Most successful forex traders know when to enter or exit the currency market by looking at a price chart. A price chart of a currency pair determines the market movements, as either trending or ranging. Trending is when the markets move in a pattern, while ranging is when they move back and forth between two levels or around a point. Traders use various technical analysis strategy tools to monitor market movements.
One of the strategies traders use to access the market movement is Bollinger bands, a 1980 invention of John Bollinger. The strategy uses two bands that forecast possible price highs and lows for a currency pair relative to a moving average. The bands move in a synchronized pattern during normal market conditions, and traders make their profits or trades by observing the distance between them to gauge market volatility.
Bollinger Band Trading Strategy Rules
- Use tools that determine a trend in the market easily. Some of the best tools to use are- Fibonacci lines, trend lines, and price channels. Place a trend line on the higher highs and lower lows. An uptrend occurs if the line is going up, and a downtrend occurs if the line is going down. Note that it should be an up or down trend and not trending sideways.
- The currency should touch or almost touch the bottom band by falling back from the trend. Check the RSI indicator for confirmation once the price touches the top or bottom of the band.
- The RSI indicator should be between 30 and 50 and rising once the price hits the lower Bollinger band. If the price hits the 80-mark, do not trade.
- Before entering a trade, you should ensure that the trend is moving upwards. A bullish pattern forms when the strong bullish candle moves to the upside while the consecutive reverse candles move to the upside. Another good time to enter a trade is when the candlesticks are moving to make a new low. If they fail to make a new low, check to see if they form a bullish pattern before trading.
- Always use a 30-50 pip stop to have a good target area and place a stop loss. You make your profit once the price connects with the other Bollinger bands.
Pros of Bollinger bands
- It offers clear and easy-to-follow market volatility visual representation, which helps traders take upside or downside risks. If the distance between two outer bands is wider, then that is increased market volatility. If the distance is narrower, that is a reflection of consolidation, leading to a breakout in price.
- It is not a standalone or signature indicator, but it is very useful, especially when you have another indicator already in place
- They are user-friendly and help the trader to add another dimension to a chart analysis when plotted automatically by a trading platform
- They help determine stop loss if you already have a trade position in place. However, you have to check the movements because it becomes dangerous if it takes on an upward and downward movement according to the trading market
Cons of Bollinger Bands
- It cannot be a standalone indicator
- Not a reliable indicator in some market conditions
- Traders take trading positions based on two lines that estimate the market but not a stop loss, which can be misleading
- They are lagging indicators and only follow current market movements and cannot predict price patterns, which means traders only get signals after the price movement is underway
- According to the inventor, John Bollinger, the man that invented the strategy, they are not fail-safe or foolproof indicators of the trends in the market, which is why it is crucial to use them in conjunction with other technical analysis tools
Wrapping it up
Forex is a prevalent trading market with more activities than other markets. Traders make profits by taking advantage of the slightest changes in the exchange market they monitor using analysis tools such as the Bollinger bands. The strategy forecasts when the price is high and when it is low using two easy-to-read bands. Even though Bollinger bands do not provide the best results as standalone strategy tools, they are very useful when using other strategies such as moving averages or Fibonacci sequence.