Bollinger Bands

Bollinger Bands
We continue to progress in our Forex course and this time we are going to start talking about the most common indicators that are used in technical analysis of the Forex market. Remember that every time you advance in the course you continue to add more and more tools to be a successful trader! The more tools you have stored in your brain, the easier it will be to build a useful and profitable trading system.

As you learn about a new indicator, think of each one as an additional tool for your operations. You will not necessarily use all these tools but it is always good to have options, right ?. So let's get started!

Bollinger Bands

[caption id="attachment_605" align="aligncenter" width="477"] Bollinger Bands[/caption]

Bollinger bands are used in order to measure the volatility of the market. Basically, this small tool tells us if the market is calm or very moved. When the market is with little movement the bands are contracted, when the market is very little stable, the bands expand.

Look at the chart below that when the price stayed quiet, the bands were closer to each other, while when the price went up, the bands broke up.

 

[caption id="attachment_612" align="aligncenter" width="500"] Bollinger Bands[/caption]

That's how easy the bollinger bands are. It is not necessary for you to know their history, how they are calculated or all the mathematical formulas behind them, the most important thing is that you learn how to apply them in your operations.

The rebounds in the bollinger bands

One thing you should know about the bollinger bands is that the price tends to return to the midpoint between the bands, that's basically the idea of ​​this bollinger rebound. If this were to happen, could you predict, by looking at the graph below, where the price will go?

[caption id="attachment_607" align="aligncenter" width="323"] Bollinger Bands[/caption]

If you said down, you got it right! As you can see, the price stabilizes by dropping towards the middle of the bands.

[caption id="attachment_608" align="aligncenter" width="311"] Bollinger Bands[/caption]

What you have just seen is a classic rebound of the bollinger bands. The reason the price turns is because the bands act as mini levels of supports and resistances. The longer the time you are with the bands, the stronger these will be. Many traders have developed trading strategies based on these rebounds, and this system is best used when there is no clear trend in the market.

Now let's look at how to use the bollinger bands when the market follows a trend.

When the Bollinger Bands are very close

When the bollinger bands are very close to each other, it usually means that a major change will happen. If the candle starts to rise above the upper band, the price continues to move upwards as a rule. If the candle begins to fall below the lower band, the price generally continues to fall.

[caption id="attachment_609" align="aligncenter" width="298"] Bollinger Bands[/caption]

In the chart above you can see how the bands come very close to each other. The price just broke above the upper band. According to this information, where do you think the price goes next?

[caption id="attachment_610" align="aligncenter" width="445"] Bollinger Bands[/caption]

If you said that up, you got it right! This is how Bollinger bands usually work when pressed against each other. This strategy is designed to observe a major movement as soon as possible.

Now you know what Bollinger Bands are and how to use them. There are many other strategies you can try with the bollinger bands.

As always, it is advisable to combine the Bollinger bands with some other indicator to have greater certainty when making trading decisions.

 

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.