You may often hear - or even use - one technical indicator called "Bollinger Bands" (hereafter we call BB). Naturally, if you often hear it, because the indicator named after the creator's name (John Bollinger) is indeed one of the technical indicators that are quite well known among forex traders.
The most accurate trend indicator that is often used by traders is Bollinger bands and will be even more stable if combined with other indicators.
Basically, all indicators are good, depending on the traders who use them, so choose and use indicators that match the trading styles.
Bollinger Bands are a useful indicator to help measure market volatility and estimate the range of normal price movements.
When price movements exceed normal limits, that's where we use to take trading positions.
Elements in Bollinger Bands Indicators
The Bollinger Bands indicator consists of a Simple Moving Average (SMA) with two bands or bands that are above and below the SMA line. The upper band is called Upper Bollinger Band and the lower band is called Lower Bollinger Band.
The Upper and Lower Bands are determined based on the addition and subtraction of the SMA value with the standard deviation. While the standard deviation measures volatility to how far the price can move from the true value. Formulation:
Upper Band = SMA (n) + k * Standard Deviation (n)
Lower Band = SMA (n) - k * Standard Deviation (n)
n = measurement period (default: 2)
Because it also takes into account the measurement of volatility, the two bands will move according to market conditions.
Bollinger Bands can be found on trading platforms in general, including Metatrader4 (MT4) and Metatrader5 (MT5) with the default SMA parameters: 20 periods, and standard deviations: 2. To place them, look for the Insert menu >>> Indicators >>> Trend >> > Bollinger Bands. After being applied to the chart, Bollinger Bands will appear similar to the following EUR / USD Daily screenshots
In general, an overbought condition occurs when the price has touched the Upper Band, but the closing price (Close) is still below the Upper Band. While the condition was stated oversold if the price had touched the Lower Band, but it was still closed above the Lower Band.
Bollinger Bands help traders to analyze whether the market is crowded or quiet based on the volatility that appears on the indicator.
When Bollinger Bands narrow (the distance of Upper and Lower narrows) means the market is quiet
When Bollinger Bands Widen (Upper and Lower distance widens) means the market is crowded
Bollinger Bands as a Measurer of Volatility
A measure of market volatility is seen in the width of the band. If the volatility is high, the distance between the two bands will be wider, as can be seen on the left side of the image above. It usually occurs when changing sideways conditions become trending conditions. On the contrary, low market volatility is seen at the narrowing distance between the two bands and usually occurs when there is a change from trending market conditions to sideways.
Trending means that the price shows a tendency to move in one direction with, either up or down. While sideways means prices tend to move up and down in a certain range (limited).
Trading with Bollinger Bands during Sideways
When the market tends to be sideways, then an open position (entry) can be done when the price has passed (penetrated) the line of the 20-SMA with the target at the level of the closest band (example in the image below). Rules:
If the price breaks the level of the SMA-20 towards the top, the entry is done when the candle closes above the SMA-20 with the target of closing position (exit) when the price reaches the Upper Band.
If the price breaks the level of the SMA-20 towards the bottom, the entry is done when the candle closes below the SMA-20 targeting the closed position (exit) when the price reaches the Lower Band.
Trading With Bollinger Bands When Trending
Typically, Bollinger Bands indicators are used for forex trading when the market is sideways. However, it can actually also be used during the trending market, with rules:
An uptrend occurs when the price has broken through the upper band and the closing price is outside the band.
Downtrend conditions occur when prices cross the lower band and are closed outside the band.
As a confirmation, it can be determined from the next bar formation. If the next bar formation is really outside the band, then a trend has been formed. Also, note that in trending conditions, the two bands tend to move wider.
Strategies Using Bollinger Bands Indicators
Bounce Trading Strategy
This simple strategy utilizes the Upper Bands and Lower Bands as dynamic support and support. That is:
Upper Bands as dynamic resistance
Lower Bands as dynamic support
Middle acts as a target
Price movements will tend to bounce back to the middle after the price reaches the Upper (Lower) Line or the Lower Line (lower).
This movement pattern that we will use to take trading positions. The way is we will take the entry
Buy, When the Red candlestick reaches the bottom line (Lower), wait for confirmation of the Green candle
Sell, when the Green Candlestick reaches the upper line (Upper), wait for confirmation of the appearance of the Red candle
The bounce technique strategy is effective if used when the market is moving steadily (note the distance between the Upper and Lower lines, if there is no sudden surge that means sideways).
Breakout Trading Strategy
With Bollinger bands, we can find out the chance for a breakout. As I explained above.
Bollinger bands tend to narrow if the market is quiet, which means that market participants are not sure where to go.
The movement of Bollinger bands narrows if the seller and buyer are equally strong, finally, the price moves in a narrow distance.
Breakout that will occur is marked by the movement of Bollinger bands (Upper and lower) quickly / suddenly widened and the price penetrated the Upper or Lower line.
Now this is the moment we will use to take trading positions. The Entry signal is:
Buy, if the Upper band's line is penetrated by the price
Sell, if the Lower bands line is penetrated by the price
Although simple, Bollinger bands are very useful indicators. Experience and observation using these indicators is also very important.
Keep in mind Bollinger bands Indicators are not an indicator that is 100% always right, so to minimize errors will be better if combined with other indicators.
Bollinger Bands Indicator Combination Strategy
Installing a lot of indicators if we can take advantage of everything is indeed good, but sometimes if too many results in the difficulty of concentration.
For this reason, install indicators as needed, in this strategy I will combine the Bollinger bands indicator with indicators: Fractal, Parabolic SAR, and Stochastic Oscillator.
The signal entry is: when all the indicators we put show the same entry signal.
The most accurate forex indicator
Buy, if an arrow appears under Candlestick
Sell, if an arrow appears above the candlestick
Parabolic SAR indicator
Buy if a parabolic point appears below the Candlestick
Sell, if a parabolic point appears above the candlestick
Stochastic Oscillator indicator
An easy way to read the stochastic indicator is to pay attention to the Period Kline (Blue).
Buy, if the blue line is above the other line and breaks the 20% line
Sell, if the blue line is below the other line and breaks the 80% line
Note: Always remember that there is no guarantee that the accuracy of this trading strategy is 100%, so always pay attention to risk restrictions and your capital arrangements.
The characteristics of a good forex indicator
As a beginner trader, you can choose the best forex indicator that is most suitable for you, namely indicators that are easy to understand and not complicated. The forex indicator can be said to be easy to understand if it can be understood by its formula Indicators can take into account how close the area is saturated with the price momentum prevailing when the trend is saturated because prices experience a certain decline or increase.
Even an accurate forex indicator will not be of much use if the trader cannot understand the flow of his mathematical calculation program easily. By mastering the indicators, traders can easily find signals that help to determine the position. If you have to bother reading, understanding, and interpreting an indicator to understand the signal on the market, then you will also have difficulty in making transactions.
Mastering various techniques for analyzing markets with the best forex indicators does require great time and determination. Before deciding to go directly to real trading you should first try your technical analysis skills on a demo account