John Bollinger developed the indicator with the idea to show the difference between a ranging environment and a breakout. The Bollinger band is made from three lines plotted on the bollinger bands trading strategies forex. These are two standard deviations and one moving average. A typical Bollinger Bands strategy is to look for a break when the two standard deviations are moving away from each other.
How to Read Bollinger Bands There are multiple ways to use the indicator. The most popular one being to look for a breakout when the bands are becoming closer to one another. This indicates a period of low volatility and a break is imminent. Contrary to the general belief, the Forex market spends most of the time in consolidation. Over seventy percent of the time, prices are moving in a range. As a definition, a breakout is when a candlestick closes above the UBB or below the LBB lines. Using the same EURUSD daily chart as previously, we can see that a breakout occurred on October 11, 2015.
And from that moment on, the Bollinger Bands indicator didn’t show a bullish breakout anymore. A sound Bollinger Bands strategy would be to stay short on the EURUSD pair until a bullish breakout appears above the UBB. Doing that would result in being on the right side of the market for over six months and avoid the noise caused by the fundamental news. How to Add to a Bollinger Bands Breakout Strategy There are two ways to deal with an underlying trend with Bollinger Bands strategies. Both are the result of knowing how to use Bollinger Bands. One is to use the MBB line as entries in the direction of the trend. If a Bollinger Bands squeeze occurs, and the price breaks above or below one of the bands, the initial position should be reversed.
The red arrows in the chart below show bearish Bollinger Bands signals given by the Bollinger Bands settings mentioned earlier. The big red candle caused by the U. Presidential election and the Trump effect is nothing but another opportunity that shows how to read Bollinger Bands indicator. As for the take profit, a classical one would be when the price is reaching the opposite Bollinger Band. In this example, as the underlying trend is bearish, the opposite band would be the LBB. For the trades illustrated so far, the target area or the exit point are highlighted in the picture above. The key to this Bollinger Bands technical analysis approach is to wait for the candle to close.
Of course, the examples above use the daily time frame, but the same principle can be successfully used on lower time frames too. Therefore, the drawdown, in case the Bollinger Bands parameters are set on a lower time frame, is not that big like on the daily chart. However, the idea regarding how to interpret Bollinger Bands indicator is the same, no matter the time frame used. So far, we saw the Bollinger Bands interpretation on a breakout strategy. It is based on how to calculate Bollinger Bands and interpret the standard deviations that indicate how volatile a market is. However, does a Bollinger Bands reversal strategy exists?
The perfect reversal patterns are the Japanese candlestick techniques. Reversal Patterns with Bollinger Bands Indicator A great way to learn how does Bollinger Bands work is to look for reversal patterns given by Japanese candlestick techniques. These are the most representatives and are forming all the time. Like anything related to trading, there is a trick here too. The best Bollinger Band strategy with Japanese candlestick techniques is to look for the reversal pattern to reach the UBB or the LBB lines. You should ignore all other reversal patterns that are not touching the two volatility lines. The example above shows a dark-cloud cover forming at the end of a bullish trend, with both candles that are part of the reversal pattern touching the UBB volatility line.
This is enough to take a short trade. As a take profit and finding your risk-reward ration, you can use the length of the dark-cloud cover To calculate it, simply measure the highest and the lowest point in the dark-cloud cover pattern. 5 or 3 to find the take profit. The stop loss should be the highest point of the reversal pattern. You can use a bigger risk-reward ratio, but that would not be a realistic approach.
In the example above, you seethat the dark-cloud cover acted as a Bollinger Band squeeze indicator as the price action that followed reached the take profit and some more. The same is valid for the hammer reversal pattern that follows. By definition, a hammer is a bullish reversal pattern, meaning a bearish trend must be in place. The idea is to use the hammer and other reversal patterns with clear rules, to develop a Bollinger Bands tutorial. Such a tutorial is like a trading plan that has both entry and exit levels.
And it is a must have for every trader interested in mastering the Bollinger Bands width indicator. Bollinger Bands Breakout with Elliott Waves Another great way to use Bollinger Bands is to integrate the indicator with the Elliott Waves theory. This is one of the most popular trading theories that exists. After all, what is Bollinger Bands indicator if not one that looks for reversals or continuation patterns when crowds are on the other side of the market? Bollinger Bands, if not a trading tool that incorporates volatility ahead of a major break?