Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because the standard deviation formula also uses a simple moving average. Additional Images. John Bollinger set his bands at 2 standard deviations due to the ability of these bands to encompass approximately 95% of the security’s price movement. He based his 2 standard deviations on a day moving average in order to provide a basis for his analysis. Therefore, when using Bollinger Bands it is recommended.
Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. John Bollinger has a set of 22 rules to follow when using the bands as a trading system. Want to know more? Read The Basics of Bollinger Bands. When the bands come close together, constricting the moving average, it is called a squeeze.
A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade.
However, these conditions are not trading signals. The bands give no indication when the change may take place or which direction price could move. Technical analysis incorporates this technical indicator and many others to create actionable trading plans and strategies. If you want to learn how to do this yourself for your own trading future, check out Investopedia Academy's Technical Analysis Course.
Also read the way bankers trade in forex market. The RSI indicator is used in this strategy to see how the currency is weakening or strengthening. Tap here for another RSI trading strategy article. These indicators should come standard on your trading platform. There is no need to adjust these, as we will use the default settings. Here You can learn on How to fade the momentum in Forex Trading. The only element would suggest performing before you start, is to draw a horizontal line on the You will find out exactly why soon.
The rules are the same concept only the exact opposite for a SELL trade. The currency is in an uptrend and then it will pull back to the lower Bollinger Band.
From there, if it follows the rules, we will execute a trade. Finding a trending market is very simple. You can use channels, trend lines, Fibonacci lines, to determine a trend.
Find higher highs or lower lows and place a trend line on them. If the line is going up it is an uptrend, if its going down, it is a downtrend. It needs to be trending up or down, not a sideways trend. As you can see in the example that price came all the way back down, from the uptrend, and touched the bottom band. The price hit the Bollinger band, the RSI when the price touches the bottom band needs to be in between 50 and You want to see the RSI go up, in this case, in the direction of the trade.
Remember that it should be in between the mark. In a sell trade the RSI would need to be in between the mark and going downward. You need to see that the trend is moving upwards, in this case, before you enter a trade. If the candlesticks are moving to a point where it is making a new low, this would not be a good time to enter a trade. However, once the candles fail to make a new a low watch to see if it forms a bullish formation.
Here is an example of master candle setup. In this example, I bumped down to a one hour chart to make an entry. This is perfectly fine to do. This could give you a more accurate place to make an entry point. As I said, the 4 hour and 1-minute time frames are the preferred time frames for this strategy. Yes, there is less of an opportunity for a trade, but the signals are very strong when you are in a higher time frame. Always remember to be placing a stop loss, and having a good target area.
With this strategy, we recommend using a pip stop. The Bollinger bands are a great indicator to use in any market. When you combine these with the RSI indicator, it should give you great entry points. Here is another strategy called trading volume in forex. Something else you can consider is when the price touches the middle band you can make a second entry to press your winners. This can potentially give you double the profit. With this strategy, we only use the one trade that we initially make, but if your rules allow you to make multiple trades at a time with the same currency pair, then adding a second position at the middle line may be something you would want to consider.
Tap here to read another great trading strategy! That stands in marked contrast to our more cautious approach to the market as a whole, so we will be monitoring this set-up quite carefully Bollinger On Bollinger Bands. John Bollinger developed Bollinger Bands in the early s and since their introduction 30 years ago they have become one of the most widely used technical indicators worldwide.
Learn how to use Bollinger Bands from the man who developed them. John Bollinger teaches you the basics of Bollinger Bands so you can use the effectively.
Bollinger on Bollinger Bands: For the 30th anniversary of Bollinger Bands, John Bollinger held a special two-day seminar teaching how to use his Bollinger Bands and which indicators to use for confirmation.
The stock broke support a week later and MACD moved below its signal line.
CCI then identified tradable pullbacks with dips below