Bollinger Bands Strategies in Forex Trading
Bollinger Bands is one of the most widely used technical analysis tools in Forex trading. It shows the high or low movement of prices relative to previous prices. In a Forex chart, it appears as three curved lines that move together. It consists of three bands: upper, lower and middle. The middle band is actually a moving average (of a period you have chosen). The upper bands are standard deviations.
Bollinger Bands can be used very effectively in Forex. Here are some useful Bollinger Bands strategies for Forex traders.
Bollinger Bands are great for swing trading. When the three bands are nearly parallel to one another and the candlesticks are moving between the lower band and upper band, you can buy every time the candlesticks touch the lower band and bounce up, and sell every time the candlesticks touch the upper band and fall down.
The stop loss should be just below the last low point in the case of a buy and just above the last high point in the case of a sell. The take profit limit should be the opposite band, or you can leave it open if you anticipate the prices to break out of the range.
This strategy works well for H4 and longer time frames.
Bollinger Bands can also be used to take advantage of breakouts. When the candlesticks have been moving within a narrow range (called the ‘squeeze’) for some time, they are likely break out below or above the bands sooner or later.
When the bands start opening up like a snake’s jaws (with the upper and lower bands pointing in opposite directions), it means the prices are breaking out the squeeze. If the candles start climbing up the upper band (making higher highs and higher lows), then it’s time to buy. If the candles start falling down the lower band (making lower lows and lower highs), then it is time to sell.
This strategy works in all time frames, but longer times can give you bigger profits. Before taking any position, make sure that the prices are really breaking out of the narrow range they have been swinging in.
Using the middle band as support or resistance
As mentioned earlier, the middle band is actually a moving average; and when there is a trend, it works either as a support or a resistance. To use it as such, insert a 20-period Bollinger Bands and it’s a 20-period moving average. Where there is an uptrend, wait for the candlesticks to fall and touch the middle band. If they bounce up from the band (with or without touching it), you can buy. Similarly, when there is a down trend, wait for the candlesticks to rise up and touch the middle band. If they fall from the band (with or without touching it), then you can sell.
This strategy works very well with H1 and higher time frames. But before taking any position, you must make sure that there really is a trend and that prices are really being rejected by the middle band. Never use this strategy when the prices are ranging.
Bollinger Bands are pretty good technical tools for Forex trading. But they can often give you wrong buy and sell signals. In shorter time frames, the support and resistance provided by the lower and upper bands can be broken easily. Therefore, you should use it in combination with other indicators, such as the RSI.
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