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How To Use Bollinger Bands? (Part I)

Try Netpicks forex signal service. As currency traders, we rely on forex market’s volatility as a means to make pips and profits. We can only make a profit when the currency pair’s price changes and moves up and down. If the price does not change, there are no pips or profits to be made. When the market produces a consistent, repeatable move up or down, we want to make pips from that change in the price level. The more the price changes, the more pips you make.

Read about trend forex system. What is volatility? Volatility is the relative rate over a period of time at which the price of a currency pair moves up and down in the market. In more simple terms, it is the amount of price change measured over a period of time. Suppose over a short period of time, the currency pair price moves up and down rapidly. The currency market is showing high volatility. On the other hand, the markets are showing lower volatility if over a time period, the price does not move much.

Develop your own forex trading system.If you are in currency trading, you should know that currency markets are either ranging or trending. Markets are usually ranging 80% of the time. In a range bound situation, the bulls and bears are in constant battle. But neither side is winning the battle. Like a long rally in a tennis match, price action is back and forth, back and forth.

When ranging, the market establishes a fairly consistent level of volatility. We want to know when the market will reverse from up or down. All of a sudden, volatility increases and the market deviates from its range bound condition. When such a break occurs we want to have an early warning indication that the move above and below the recent range is a significant deviation from the norm.

Bollinger bands estimate based on market’s recent level of volatility, the probable high and low price of a currency air. The bands are drawn at an equal distance above and below a simple moving average (SMA).

The stronger the bands are, the longer the time frame you are in. These bands act as mini support and resistance levels (S&R). Think of Bollinger bands as an envelope indicator that is projecting top and bottom lines around price.

Bollinger bands are self adjusting. Bollinger Bands expand, open up and move in the opposite direction when the market becomes more volatile. The bands respond by contracting and becoming closer together when the market moves into tighter prices. In a range bound market, the bands are almost parallel.

There are three ways you can use Bollinger Bands in your trading. These are: 1) Range Trading. 2) Breakout Trading. 3) Tunnel Trading. You should now read Part II of the Bollinger Band article. John Bollinger was a famous technician of the markets in his days. Bollinger Bands were first introduced by John Bollinger in 1980s.

How To Use Bollinger Bands? (Part II)

Know the forex market.Bollinger Bands are based on the standard deviation. A standard deviation is the measure of the spread of a set of number. The higher the difference between the closing prices of a currency pair and the average price, the larger the standard deviation and the volatility of the currency pair. 95% of the recent closing prices are expected to be within the two standard deviations of the currency pair when the markets are range bound. In a range bound market, in other words, if the price pops above or below the Bollinger Bands, it does not belong there.

Learn forex scalping. Lower BB= 20 SMA-2(Standard Deviation). Upper BB= 20SMA + 2(Standard Deviation. This formula is used to calculate the lower and upper Bollinger Bands. There are three different ways you can setup trades using BB.

Get good forex training. Range Trading: In a range bound market, Bollinger Bands envelop lines are parallel to each other. You can use the bands to enter or exit a trade and consider trading within the range identified by the Bollinger Bands.

Suppose the price reaches the upper band. The market is considered to be overbought. Suppose the price touches the lower band. The market is considered to be oversold. However, it in itself is not a trading signal when the price touches the upper band or the lower band.

You are seeking opportunities to profit. You are not seeking opportunities to trade! Trade without profit should be avoided at all cost. Once the reversal pattern is confirmed by other indicators, you can place your stop loss on the other side of the Bollinger Band. Do not predict a support or resistance level based solely on Bollinger Bands. Wait for the price to bounce first. Seek confirmation from other indicators before you enter a trade.

Breakout Trading: It is an indication that a breakout and a new trend is about to develop when the price breaks above or below the upper or lower band. Seek confirmation by using a momentum indicator. You can use a 5 EMA cross or an 8 SMA cross or a stochastic cross. This will filter out a false breakout. Suppose the price breaks above the resistance on the upper band. Enter a long trade. On the other hand, suppose the price breaks on the downside on the support level. Enter a short trade.

Tunnel Trading: Expect a breakout to occur in the near future when you see the Bollinger Bands becoming tight and narrow. The greater the breakout will be the longer and narrower the Bollinger Bands are. Now pay attention! This is only true between the times 5 A.M to 5 P.M London Time.

Tunnels created during the odd hours of currency trading simply show that no one is trading at that time! Most of the traders are out. A breakout is not likely to happen until the traders return to their charts. This is also known as the, “Bollinger Band Squeeze.” When a breakout happens, a new trend is started. The Bollinger Bands spread further apart and is an excellent indication to plan a trade.