Bollinger Bands are common with traders and technical analysts in all markets, including Forex trading. It is crucial to have a successful strategy that will help your net profits if you are trading with currencies and are looking for incremental price moves for profit, recognizing trend changes fast and volatility.
Forex trading is one of the most prevalent trading platforms globally, has more activity than the stock market. Traders can only generate profits by selling and buying different currencies at a beneficial price. For this, they need to take advantage of any slight changes in the exchange rates.
The is the same theory that applies when trading any asset. If you expect currency price to go up, you should buy the currency. If you expect the currency price to go down, then you should sell the currency.
Factors to Consider When Using Bollinger Bands.
Bollinger Bands are technical analysis tools used by traders to plot trend lines two standard deviations away from the SMA (simple moving average) price of a security. The goal of using Bollinger bands is to help you know when to exit or enter a position. It does this by assisting the trader in identifying when an asset has been oversold or overbought.
The name Bollinger Bands is coined from the designer, John Bollinger. This tool is designed to signal changes in volatility. For many currency pairs, Bollinger Bands acts as clear signals for selling and buying for steady security ranges. However, this can also result in frustrating losses and stop-outs, so you when using Bollinger Bands to place trades, you should consider factors like:
The Setting Limits
The first thing you should do before using this tool is understanding how they are set up. The upper and lower band should be set at a distance of two standard deviations from the 21-day simple moving average security. The Bands tend to show price volatility in relation to the average; hence you can expect movements in price between the two bands.
You can use the bands to buy orders at the lower band limit or place sell orders at the upper band limit in Forex trading. Take note that this strategy often works well with currencies following a range pattern. However, if a breakout occurs, it can turn out costly for the trader.
The Backup Plans
Considering that the reactions are not as intense sometimes, traders can miss profits if they directly set the orders on the lower and upper Bollinger Bands. To avoid disappointment, we recommend you determine the exit and entry points near the lines.
Another trading strategy is working around this by adding a second set of Bollinger Bands. Place them one standard deviation from the MAs to create upper and lower channels. Then place buy orders within the lower zone and the sell orders in the upper zone. This will help increase the execution probability.
The Reading Volatility
When price fluctuations decrease or increase, the Bollinger Bands will react and change shape because they measure deviation from the average. You will know new normals will be set when you notice increased volatility, and you can use Bollinger Bands to capitalize on this.
You will notice lower price volatility when the Bands converge on the MA, which is known as ‘the Squeeze,’ and it’s one of the most reliable signals provided by the bands. It is perfect for Forex trading. Bollinger Band Squeeze can help you spot trend changes without having to hear it from the news first.
Several other strategies are used in Forex trading with Bollinger Bands, like the Pure Fade Trade and the Inside Day Turn Trade. They are all profitable trades; however, you should develop and follow the exact methods if you want them to pan out to your advantage.
Traders will find Bollinger Bands useful in assessing their position volatility, which then provides them with the best insight into whether to enter or exit a position. Currency traders in Forex will find that some aspects of Bollinger Bands like the Squeeze work well for their trading. And so does add a second set of Bands. When used correctly, traders and investors will make better decisions with these Bands and earn better profits.