What are Bollinger Bands? What are they in aid of?
Once you’ve made a choice of a proper trading platform and have decided in favor of one of the best forex brokers, don’t think this is all you need. To make your career lucrative and successful, you have to know how to forecast market changes the right way. Various techniques are used for this purpose, and one of them is based on the so-called Bollinger Bands (BB).
BB is a trading technical tool invented by John Bollinger. It is a graph with three curves (bands) that are displayed against the price of the currency pairs.
The mid-term trend is measured by the average band. This is the moving average, and it serves as a base for the upper and lower bands. The interval between the upper, average and lower band determines the market volatility.
In most cases, the standard deviations are the figures used by the moving average.
Bollinger lines are used to capture the variability of prices. Prices beyond the upper or lower bands are relatively low or high (oversold or overbought positions). You can use this comparative definition for analyzing price movement, or as a helpful indicator of the right time to buy or sell.
How to use Bollinger Bands?
To help you understand how to use BB, we have to get deeper into detail. Bollinger Bands are used as price points: with narrow bands the price jumps up and down within the outer bands. This means not the best time to make a deal, as its range is narrow, and, in addition, in a 1-5 minute chart you can have good profit.
If you notice a rapid approach to the limit price of the transaction and, judging by the indicators, the price has just started to change and quick reverse is not to be expected
It is possible to fix pips and to move up and down in case the range is not narrow. For example, within a 1-5 minute period and using 5/9/18/50 EMA; however, once you don’t make at least 5-10 pips up and down, you better keep off. Rapid moves always imply the risk to the transaction.
In most cases it is possible to make a deal as if starting out from the outer bands. The only exception is the period when the bands are too narrow, which is called “Bollinger rebounder”.
When you place a deal, put ‘stop’ on the outer bands, and the limit target sale price should be at the outer band level. If you notice a rapid approach to the limit price of the transaction and, judging by the indicators, the price has just started to change and quick reverse is not to be expected, you should either change the limit price and let it have the possibility to change, or raise it by 10 pips maximum. After that, raise ‘stop’ to the entry point so that it is fixed either at the breakeven point, or, if the price moves in your favor, even at some profit.
In case of a price breakthrough you should do exactly that; if, during a prolonged breakthrough, the price continues to go up, adjust the ‘stop’ upward to secure greater profits and continue increasing the limit. This is called a trailing stop.
There is a more sophisticated way of using these bands. It is based on applying two sets of bands, with the average of each being set to 18. For one set of bands standard deviation should be set to 3, for the second set, to 1. Thus you get six short-term lines of support/resistance. Target and internal stop are the outer bands, and the inner bands you can use for short-term support and resistance of the trailing stop. Two outer bands can be interlaced.
This technique has been developed because of the need for adaptive trading lines and due to the realization that, in contrast to earlier views, the volatility of the markets is not a static but a dynamic phenomenon. This method has much in common with Fibonacci, but is not as difficult in practical use.