What are Bollinger Bands in Forex

Bollinger Bands are one of the most popular technical indicators in any fiscal market place, including Forex. They were created by John Bollinger in the early 1980s from the need for adaptive trading bands that could accurately reverberate price volatility. Learn in this complete article what is Bollinger Bands in Forex, an indicator used past professional traders and how to read information technology's signals.

Table of Contents

  • Bollinger Bands in Brief
  • Bollinger Bands Strategy #1: Bollinger Bounce
    • Bollinger Bounce Confirmation Indicators: RSI and Candlesticks
    • Bullish Bounce:
    • Bearish Bounciness
    • Benefits and Risks
  • Bollinger Bands Strategy #2: Bollinger Break
    • Bullish Break
    • Bearish Break
    • Benefits and Risks

They are most frequently used to determine overbought and oversold levels, selling when cost touches the upper Bollinger Band and buying when it bounces off the lower Bollinger Ring. This technique works well in range-leap markets, and for getting in on bounce trade in the management of the primary trend. One tin likewise use Bollinger Bands to enter in breakouts beyond the bands, peculiarly later on a catamenia of time in which the bands accept been relatively narrow. We will examine in due course both these methods: the bounce and the suspension.

Bollinger Bands in Cursory

Bollinger Bands consist of a set of 3 bands drawn in relation to price: there is the 20-flow moving average in the heart, with an upper and lower band of two standard deviations above and beneath the simple moving average. Standard deviation is a statistical measure that offers a practiced reflection of price volatility. Since 68% of the data falls inside plus or minus 1 standard divergence of the average, then a standard deviation two means that price will be distributed 95.5% within the 2 deviations of the mean. These trading bands plotted in and around the price structure form an "envelope" and it is the activity of prices near the edges of the envelope that are of item involvement.

When the toll sharply changes, the bands volition widen and expand, reflecting greater volatility, and when prices practice not alter much, the bands will narrow and contract, reflecting the lack of volatility.

Bollinger Bands

We do non demand to get into the mathematical formula behind Bollinger Bands, or its history, because for all applied purposes that information is irrelevant. If you really want to know about the calculations and minutia backside Bollinger Bands you tin can visit www.bollingerbands.com.

Bollinger Bands Strategy #1: Bollinger Bounciness

Studies have shown that the penetration of Bollinger Bands only occurs up to 15% of the fourth dimension. The rest of the time prices fluctuate within the Bollinger Bands, and oft price returns to the middle of the bands. In this fashion Bollinger Bands seem to act similar rubber bands that can only stretch so far before snapping back to the middle or hateful. The upper and lower ranges of the Bollinger Bands, which are created by the 2-standard departure lines, create the boundaries of price.

Since there are greater odds that cost will be contained within the bands instead of penetrating them, one of the surest and most mutual ways of trading the Bands is to purchase when prices nearly the lower band and sell when prices near the upper range ring.

Bollinger Bands

You tin can come across in the above nautical chart that there are at least 5 instances in which price touched the outer bands merely to retrace back to the middle or to the opposite ring. This does not mean that i should take counter bounce trades at every time price meets the outer bands. It is much smarter to accept counter bounciness trades in the direction of the master trend, along with boosted confirmation indicators such equally candlesticks and RSI.

Bollinger Bounce Confirmation Indicators: RSI and Candlesticks

Only because prices hit the upper or lower Bollinger does not necessarily mean that it is a good fourth dimension to sell or buy. Strong trends will "ride" these bands and wipe out any trader attempting to buy on the "low" prices in a downtrend or sell on the "high" prices of an uptrend. In fact, price volition be making new highs in an uptrend and new lows in a downtrend, hitting and exceeding the bands, speedily taking out the stops on trades taken directly on the bands. Information technology is thus a good idea to trade the bounce with other confirmation indicators like the RSI and Candlesticks.

If you are trying to trade the bounce from Bollinger, information technology is ofttimes adept to come across pay attention to the Relative Strength Indicator or RSI. We are non looking to the RSI to run into if it is overbought or oversold, simply to run across how information technology is strengthening or weakening. In full general, one would brusque the currency if penetration of the upper Bollinger Band occurs while the RSI is showing weakness (greater than 50-80 and falling). Conversely, one would buy the currency if penetration of the lower Bollinger Band occurs while the RSI is showing strength (below thirty-50 and ascent). In this manner, we are looking at RSI as an early trend indicator, confirming the counter-tendency motion off the bands.

Also, 1 can be patient and wait for the candlestick that confirms the reversal. Once the bar penetrates the upper ring, you can look for bearish candlesticks, and once the bar penetrates the lower band, y'all can look for bullish candlesticks. If the candlesticks are making new highs or lows beyond the bands, that is not a good time to enter. But if a candlestick after the penetration fails to make a new high or low, watch to see if and then forms a bearish or bullish formation: long black torso or long upper shadow for Surly, and long white body or long lower shadow for Bullish. Please refer to my commodity on Candlestick Patterns.

Optimal Bollinger Bounce Time Frames: The longer the time frame, the more infrequent the bounce opportunities nonetheless stronger the bands tend to be. It is a trade-off. Yous desire to have many opportunities and y'all desire to have strong bands, but it is difficult to find the balance in both. We have institute H4 to work the all-time. You will get enough of trading opportunities and the timeframe reflects strong bands.

Bullish Bounciness:

A bullish bounce (or bullish reversion) is when the currency is in an uptrend and then pulls dorsum to the lower Bollinger Ring. Your entry should be a bullish candlestick that has already reversed into the pre-existing trend.

Entry Conditions:

  1. Currency is in an uptrend
  2. Currency hits or comes very close to hitting the lower Bollinger
  3. Await for RSI to be beneath xxx-50 and ascension
  4. Look for Bullish reversal candlesticks and patterns

* Make certain you take merely one-2 such trades per day. If you accept been stopped out on two trades, it is a sign that the market is in a stiff cosmetic stage, and taking farther bounce trades off the bands is not a skilful idea.

Get out Conditions:

  1. Stop loss that is twenty pips below the third deviation lower band (you need to plot one), or 50-80 pips from entry.
  2. Breakeven trigger at the middle of the bands.
  3. Accept profit at the other Bollinger Band or 100-150 pips.

Bollinger Bands

In the in a higher place chart the bands had narrowed only after an expansionary phase, indicating the time was ripe to take advantage of a balderdash bounciness trade in the direction of the bullish primary trend. The bullish candlestick that penetrated the lower band retreated to close just higher up, indicating that this was the time to get set to pull the trigger. Since the next candlestick showed a squeamish bullish body, and RSI had strengthened, information technology was fourth dimension to enter long at the close of that bar (1.4565). 4 candlesticks later my 100 pip Take Profit was striking. Using these multiple conditions for confirmation ensures a more than likely win.

Surly Bounce

A bearish bounciness (or surly reversion) is when the currency is in a downtrend so pulls up to upper Bollinger Band. Your entry should be a bearish candlestick that has already reversed into the pre-existing trend.

Entry Conditions:

  1. Currency is in a downtrend
  2. Currency hits or comes very close to striking the upper Bollinger
  3. Await for RSI to be in a higher place 50-fourscore and falling
  4. Look for Surly reversal candlesticks and patterns.

* Brand sure yous have merely 1-2 such trades per day. If you take been stopped out on 2 trades, it is a sign that the market is in a stiff corrective phase, and taking farther bounce trades off the bands is not a adept idea.

Go out Conditions:

  1. Stop loss that is xx pips above the third deviation upper band (yous demand to plot one), or 50-80 pips from entry.
  2. Breakeven trigger in the middle of the bands.
  3. Take profit at the other Bollinger Band, or 100-150 pips from entry.

Bollinger Bands

In the above nautical chart market had been slowly creeping lower, indicating that the larger tendency had been downward, when unexpectedly a very long Bullish candlestick forms from the lower band and ends at the upper band. These types of candlesticks on steroids are rare, probably triggered past a news event, and when they occur counter to the master trend, you lot can bet that they will have wearied themselves by the fourth dimension they have bridged the entire Bollinger Band corridor. Seeing that candlestick grade so touch the upper band would take been an alert to load your gun and take aim at the head of this intruder. Seeing that the side by side candlestick fails to make a new loftier and becomes surly, in improver to seeing the RSI weakening, are the signals to pull the trigger. Toll never does continue frontwards but falls from the entry, and over the grade of the next few candlesticks, the 100 pip take profit is easily achieved.

Benefits and Risks

This bounce setup is dynamic, meaning that it works on all time frames. Short-term traders can use it on the hourly charts, intermediate-term traders on the four-hour charts, and position traders on the daily and weekly charts. Bear in mind that the shorter the timeframe the less reliable the indicate, though we even so want a timeframe that can give us some trading opportunities.

Many traders have adult enormously successfully Bollinger Bounce systems that can have reward of ranging conditions, or meliorate nonetheless, a correction from the trend. Now, what happens when the market trends beyond the Bollinger Bands? Hopefully, your bounce strategy's filters would take prevented y'all from getting into that trade, or else yous would accept been stopped out. You can as well exploit the breakout opportunity, as we see beneath.

Bollinger Bands Strategy #2: Bollinger Intermission

The breakout from Bollinger can ofttimes be predictable by what is called the squeezing of the bands. When the bands squeeze together, or narrow, the market has entered into a channeling phase of low volatility. The longer information technology moves inside this narrow band, the more likely the market is somewhen going to penetrate these bands and continue on in the direction of the breakout, peculiarly if this event occurs in the direction of the previously established longer-term trend. Timing is everything, however, and just nosotros do not know how long the squeeze volition final.

Note: Bollinger Band as Filter. You definitely practise not want to be in a breakout trade during a range leap marketplace. If you tried to breakout at the top of range bound channel, it will become the noose that hangs y'all equally the market falls back to the other side of the channel. I way to determine if the marketplace is range spring is to apply the Bollinger band as a filter. What you do is measure the distance between the upper and lower band. Yous determine through back-testing that if the distance is less than X pips (we volition telephone call information technology BBRange) so the Bollinger bands are too narrow and you should avert trading. If the market had been in this narrow BB range and then expands beyond it, then that becomes the 2nd and third condition of the entry setup. The first condition is that you lot should be only taking trades in the direction of the main trend.

The hooking of the bands: the upper band pointing upward and lower band pointing down. The visual key is to scout both the upper and lower ring as toll approaches them. If the bands remain flat or constrict or merely one band hooks while the other does not, then y'all have a sign that not much is nearly to happen notwithstanding. However, if upper band is rise while the lower band is falling, this signifies that a potential explosion in price activeness is almost to occur, in the direction of the candlestick pushing against the band. The more vertical, the stronger the potential move.

Other indicators: Candlestick and RSI. Just like the bounce merchandise, you can use the candlestick patterns and RSI as confirmation indicators for taking the trade. You desire a breakout or breakup candle to have a bit more range than otherwise. Y'all want RSI to be strengthening for a Bullish trade and weakening for a bearish trade.

Bullish Break

A bullish interruption occurs after constriction of the Bollinger Bands and then price breaks and expands the upper band to the upside. The upper ring is pointing upwards and the lower band is pointing downwardly.

Entry Conditions:

  1. Currency is in an Uptrend
  2. Currency was locked in a narrow ring
  3. Cost reaches upper band and upper band hooks up while lower band hooks down
  4. Breakout candle has more than range than previous candles
  5. RSI is 30-50 and rising

Go out Conditions:

  1. Cease loss that is xx pips below the eye band, or fifty-80 pips from entry.
  2. Take profit that is 100-150 pips from entry.

In the chart higher up the marketplace had entered a brief wrinkle (squeeze) menstruation of 5 bars, which would accept alerted the trader to be mindful of a potential pause beyond the upper band in the management of the main trend. When a strong and healthy bullish bar moves up from the middle band to penetrate the top ring, that would be the sign to pay attention: a break has just happened and we want a couple confirmation signs. I confirmation sign is that visual cue that the upper band is hooking upwards at the same fourth dimension that the lower ring is hooking downwards. The other confirmation sign is that the next bar is besides bullish and makes a new high, indicating that the break had been successful, and with no bounce in sight, one should enter a buy at market place at the close of the candlestick.

Bearish Break

A bearish interruption occurs after constriction of the Bollinger Bands and so price breaks and expands the lower ring to the downside. The upper band is pointing up and the lower band is pointing down.

Entry Atmospheric condition:

  1. Currency is in a Downtrend
  2. Currency was locked in a narrow ring
  3. Price reaches upper band and upper band hooks up while lower ring hooks down
  4. Breakdown candle has more range than previous candles
  5. RSI is 50-80 and falling

Exit Atmospheric condition:

  1. Terminate loss that is twenty pips above the middle band, or fifty-fourscore pips from entry.
  2. Take profit that is 100-150 pips from entry.

The above nautical chart starts with the market narrowing, with the candlesticks trying desperately without luck to push the market place and upper band college against the downward current of the main trend. When three strong surly candlesticks then descend downwards to the lower band, one would take awakened like Goldilocks to the potential southern interruption. The fourth candlestick that penetrates the lower band becomes a long-legged Doji, information technology would accept given suspension as to the determination of the bears. However, 1 would be given confidence by the visual cue that the upper ring was hooking upwards at the same time that the lower band was hooking downward. Moreover, one would take seen that the RSI was weakening. When the fifth candlestick becomes strongly bearish, you lot would had a more than definite confirmation that the pause had been successful and you would take put a sell at the shut of the candlestick, easily capturing 100 pips over the adjacent four candlesticks.

Benefits and Risks

Though the breakout squeeze trade occurs less oftentimes than the bounce trade, it is withal a very powerful strategy to consider using. Information technology may occur only 15% of the time, but when it occurs it can represent a very significant breakout move.

Bear in mind that if you try to take on every breakout case where the cost pushes confronting the bands, your business relationship would be speedily destroyed. You have to exist on the lookout man for other confirmation indicators. You should be trading in the direction of the main trend after the bands had already narrowed for a period of fourth dimension. Y'all desire the bands to hook vertically upwardly and down, y'all desire the penetration candles to exist large, and you want RSI to be strengthening for Bullish trades, weakening for Surly ones. If you follow all these conditions y'all can all the same be incorrect, and thus you must place a stock-still stop non too far abroad from entry, hiding out behind the centre band.