Bollinger bands strategy in forex trade
As someone very interested in advancing in their forex trading career, it is clear that you are interested in various strategies and ways to achieve that. The Bollinger Bands strategy is one of them, discussed in more detail below.
But above all, we want to address one fact: Forex trading is, without a doubt, among the most profitable and compelling online businesses at the moment. Those who have just stepped into the Forex trading industry know-how challenging forex trading is. It is about selling one currency for another at the same time for reasons such as commerce, trading and tourism.
Trading takes place on the largest decentralized financial market known as the Forex market, with a daily turnover of 6.6 trillion. To be successful in Forex trading, you first need to choose a quality forex broker and an adequate forex trading strategy such as the Bollinger bands strategy.
Why is the Bollinger Bands strategy the ideal choice for your trading? And why is choosing a good trading strategy crucial to the success of your business? Let’s first explain the importance of an adequate strategy.
Why is it important to choose an adequate Forex trading strategy?
No matter what work they do, all successful people would not have achieved even half of what they are if they did not have a specific plan or strategy that was their guiding star. The same goes for Forex and traders. If Forex traders did not have an adequate Forex trading strategy as the Bollinger Bands strategy in many cases, they would not be considered successful and wealthy today.
The importance of strategy is enormous. It helps provide traders with deep insight into where or when to buy or sell a particular currency pair. If you stick to your trading strategy, you’ll remain focused amid an enormous inflow of economic data and news that can vigorously impede your analysis process.
Following a particular trading strategy will avoid unpleasant surprises, potential risks, and money losses. Using a predetermined Forex trading strategy based solely on price action will allow you to profit, disregarding the regularly incoming news.
What represents the Bollinger bands strategy in Forex?
Although there are many great forex trading strategies such as scalping, swing trading, day trading, position trading, price action trading, trend trading, and others, one particular strategy has proven extraordinarily profitable and excellent with many traders around the planet. It’s a Bollinger Bands strategy.
It’s crucial to know that Bollinger Bands represents a technical analysis tool that has evolved from the concept of trading bands. It is widely used for measuring the highness or lowness of the price relative to previously made trade. It was invented by John Bollinger, an American financial analyst, and author, in the 1980s.
In other words, Bollinger Bands represent a type of statistical chart that shows prices and volatility over time of a financial commodity of the instrument using a formulaic method.
What do Bollinger Bands consist of?
The Bollinger Bands, in original form, consists of the following:
- A middle band is an N-period simple moving average (MA)
- An upper band (MA + Kσ) at K times an N-period standard deviation above the middle band
- A lower band (MA – Kσ) at K times an N-period standard deviation below the middle band.
What is the goal of Bollinger bands strategy?
The goal of Bollinger bands is to help a Forex trader find out when to enter or exit a position by identifying when an asset becomes either oversold or overbought. Bollinger bands are helpful by signalling changes in volatility. It is a relatively clear signal for buying and selling steady security rangers such as numerous currency pairs.
All this may result in stop-outs, execution of a stop-loss order, and frustrating losses. Therefore, traders may consider other factors once they place trades in relation to the Bollinger bands.
Bollinger Bands strategies – get to know the essential ones.
When it comes to Bollinger Bands strategies in Forex, we would like to single out a few of the most important ones that you must keep in mind during trading. Let’s start from the first, shall we?
#1 Bollinger bands forex scalping strategy
Here is an example if you choose a Bollinger bands forex scalping strategy. We have the GBP/USD currency pair. Using Bollinger bands on standard chart settings, which are 20 lengths with two standard deviations, means that you will be looking for a fiat Bollinger band.
The rules of a Bollinger band’s forex scalping strategies are that you will go short with a ten pip stop once the price touches the upper band.
On the other hand, you will exit the trade when the price touches the lower band. You will go long once the price touches the lower band with a ten pip stop. Once the price touches the upper band, it is time for you to exit the trade.
#2 Double Bollinger bands forex strategy
When it comes to the Double Bollinger Band strategy, a trader should know that it uses two Bollinger Bands to filter exits and entries in the foreign exchange market. This strategy focuses on entering long trades when the price breaks above one standard deviation, and opposite, entering short transactions once the price breaks below it.
A double Bollinger bands forex strategy applies to ranging markets as a breakout strategy. It can also be used when assessing the slowdown of an existing trend.
Bollinger Bands Set-Ups
A Forex trader interested in a Bollinger bands strategy should understand the setup.
There are upper and lower bands, each set at a distance of two regular deviations from the 21-day simple moving average security.
For that reason, the Bands show the volatility of the price concerning the average. In addition to that, Forex traders can expect price movements anywhere between two bands.
Traders can use these bands to place sell orders at the upper band limit and purchase orders at the lower band limit. What is vital to note is that this particular strategy works fine with currencies that pursue a range pattern. However, it can be pricey to a trader if a breakout occurs. That’s why it is essential to set the limits.
Bollinger bands react and change shape
It’s essential to understand that Bollinger Bands react and change shape once price fluctuations increase or decrease. The reason behind this is that they measure deviation from the average. A trader must know that increased volatility is often a sign that a new normal will be set. Moreover, traders may capitalize using Bollinger bands.
Once the Bollinger Bands assemble on the moving average, indicating volatility, lower price, it’s called “the Squeeze.” In short, it’s one of the most decent signals by Bollinger Bands and works fantastic with forex trading.
In October 2014, a squeeze was noticed in the USD/JPY currency pair. There are some indications that the Bank of Japan would be increasing its stimulus bond-buying policy in this case. It sparked the trend change that could be spotted with the Bollinger Band Squeeze, regardless of whether the trader heard about this news or not.
Backup Bollinger Band strategies are recommended
In some cases, traders can miss profits by setting orders directly on the lower and upper Bollinger Bands. If that’s the case, it’s wise to determine entry and exit points near these lines to avoid disaster.
One Forex trading strategy that a trader can consider is to add a second set of Bollinger Bands placed only one standard deviation that will be taken from the moving average and creating lower and upper channels. Afterwards, buy orders will be placed within the lower zone. Meanwhile, the sell orders will sit in the upper zone, increasing the execution probability.
Limitations of Bollinger Bands that you need to understand
Every trader needs to know that there are certain limitations of Bollinger bands. First of all, they are not standalone trading systems. Instead of that, they represent one indicator that is designed to provide traders with price volatility information.
The inventor of this strategy, John Bollinger, suggests that traders use it with two or three other non-correlated indicators to provide them with more direct market signals. John indicates that it’s vital to use these indicators that are based on a variety of different data.
He points out that his favourite technical techniques include moving average divergence/convergence, known as MACD, on-balanced volume, and relative strength index, or RSI.
They weigh older price data since they’re computed from a simple moving average. It means that outdated data may quickly dilute new information. In addition to that, two standard deviations and 20-day SMA usages aren’t suitable for everyone in every situation. Therefore, traders should adjust their standard deviation assumptions and SMA appropriately and constantly monitor them.
In summary, we’d like to point out that there are many uses for Bollinger Bands. It includes overbought and oversold trade signals. In addition to that, traders can add multiple bands, highlighting the strength of the price movements.
Besides the overbought and oversold trade signals, Bollinger Bands could look for volatility contractions usually followed by clear price breakouts, which ideally have significant volume.
However, it’s crucial to understand that Bollinger Bands are not confused with Keltner Channels. Even though these two indicators are somewhat similar, they’re not the same.