What is the Bollinger Bands forex trading strategy?

What is the Bollinger Bands forex trading strategy?

What exactly are Bollinger bands?

Bollinger Bands are a technical analysis tool for trading stocks that were made in the 1980s by John Bollinger. The bands are part of a volatility indicator that calculates the relative high and low of a security's price in relation to previous trades.

The standard deviation, which changes as volatility rises or falls, is used to measure volatility. When the price rises, the bands become wider, and when the price falls, the bands become narrower. Because of their dynamic nature, Bollinger Bands can be used to trade a variety of securities.

Bollinger bands are comprised of three lines: the upper, middle, and lower. The middle band is a moving average, and its parameters are set by the trader. The upper and lower bands are on the moving average band's opposite side.

The trader decides how many standard deviations to set the volatility indicator to. The number of standard deviations tells how far apart the middle band is from the top and bottom bands. The location of these bands shows how strong the trend is and where prices might go high and low in the near future.

Important Point:

• Bollinger Bands are a technical analysis used to draw trend lines two standard deviations away from a financial instrument's simple moving average price.

• Bollinger bands can be used to show changes in the volatility of a financial instrument.

• Forex traders may set sell orders at the upper band limit and buy orders at the lower band limit using the bands.

• To deal with certain risks when using Bollinger Bands, traders should find entry and exit points near the lines and act accordingly.

• Another method is to set the second set of Bollinger Bands to be one standard deviation away from the moving average, thereby creating channels that can be used to determine trades.

Strategies for Bollinger Bands

1. The RSI Strategy

The Bollinger Bands indicator is handy for identifying valuable areas on a chart. However, there is a flaw: it must indicate whether the move is strong or weak.

How can you tell whether the market will continue to trade outside the outer bands, or will it mean a revert?

The Relative Strength Index (RSI) indicator is used in this case. You'd also like to see divergence on the RSI indicator.

When the market makes a higher high, but the RSI indicator makes a lower high (a sign of weakness), this is called a bearish divergence. When the market makes a lower low, but the RSI shows a higher low (which is a sign of strength), this is called a bullish divergence.

If the price is above the upper Bollinger Bands, a bearish RSI divergence will indicate weakness in the underlying move. If the price is trading near the lower Bollinger Bands, a bullish RSI divergence indicates strength in the underlying move.

2. Options trading Strategy

Bollinger bands are one of the most important technical indicators because they adjust well to volatile market conditions. This indicator can be used to find times when price changes are likely and when volatility is high.

In terms of volatility, Bollinger bands can show when volatility is at an all-time low compared to the asset's recent history. They do so by approaching each other and "squeezing" together.

Options traders refer to these low-volatility periods as consolidations. They will then execute trades based on the new price trends that emerge when the asset's price breaks out, and market volatility is present.

The Bollinger Band indicator has the advantage of making it extremely simple to identify times when the market is more likely to break out in the near term.

The main benefits of this are that it allows options traders too, while also allowing them to identify potentially profitable trading opportunities. Squeezes and expansions of the Bollinger Bands indicate low and high price volatility, respectively.

Bollinger Bands are, therefore, effective trading indicators for volatility plays in the options market, where traders can use long straddles and strangles when the market is expected to be volatile or short straddles and strangles when the market is expected to be volatile.

3. Using the Average Moving Strategy

Trading with Bollinger Bands allows for a variety of strategies. Here's another way to use this indicator. This time, we combine it with a simple moving average. The length is set to 200. This strategy requires a fundamental understanding of price action.

How should this strategy be put into action? You must consider the price's relationship to the MA200 when the price exceeds the moving average, the asset uptrends. What does it mean? We'll be on the lookout for "buy" signals.

If you look closely at the screenshot above, you will notice a hammer signal, which indicates that the price is about to start rising. This is a long-term strategy. You can exit the market if the price falls below the MA200.

4. MACD Trading Strategy

The Moving Average Convergence Divergence indicator is an excellent addition to a Bollinger Bands strategy. The simplest way to use both indicators is to find the points where the moving averages of the MACD cross each other below the histogram. This is the first trigger that will alert you to the current situation.

5. Price Action Strategy

Bollinger bands are a handy indicator, but they need some help to be effective. We recommend using the price action strategy if you don't want to use any additional indicators. What exactly is the goal of this strategy?

This strategy has two primary signals that you should always remember. The price should be close to one of the envelope's edges.

When you fully comprehend price action, this strategy appears to be very simple. This morning star can be easily substituted for any other Price Action model. The result will be the same.

Bottomline

The methods described above are the most commonly used Bollinger Band strategies. This list, on the other hand, needs to be more conclusive. You can create your own strategies by leveraging the benefits of this indicator.

We hope you found this blog informative and will put it to good use in the real world. Also, if you like this blog, please share it with your family and friends and help us spread the word about how to manage money.