Have you ever heard of Bollinger Bands? If you are interested in the financial markets including forex, commodities, and futures you should know it.
Today, we will handle Bollinger Bands. I will give the answers of following questions in this article:
What are Bollinger Bands? How to use Bollinger Bands on forex? What are the Bollinger Bands strategies? What is Bollinger Band Squeeze?
Bollinger Bands are a technical trading tool developed by John Bollinger in the early 1980s. They have appeared due to the need for adaptive trading bands and the need to determine whether volatility is dynamic or static.
It was widely believed to be static. Actually, it is not. This trading tool shows us it is dynamic. Bollinger Bands are quite popular technique among traders.
But although these bands are some of the most useful technical indicators if appropriately applied, they are also among the least understood.
Traders can use them to read the trend strength, to time entries during range markets and to find potential market tops.
There is no lagging in this indicator because it always uses the real-time price actions and volatility to adjust to the current environment.
The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band.
Although this definition helps to determine very rigorous price movements, it is also beneficial in comparing the price movements with the indicator movements to arrive at systematic trading decisions.
As the name tells, they are price bands that are placed above and below price.
The outside Bollinger Bands originate on price volatility. It means that when the price fluctuates and changes strongly, they expand. And, the Bollinger Bands contract during sideways consolidations and low momentum trends.
The center of the Bollinger Bands is the 20-period moving average and the perfect addition to the volatility based outside bands.
How can you use Bollinger Bands during trends?
As I said before Bollinger Bands do not lag because they always use the real-time price.
It is important to use them to analyze the strength of trends. The main issues about doing that you need to pay attention are:
- The price stays close to the outside band during strong trends
- It shows fading momentum when the price pulls away from the outside band during trend continues
- It is a lack of power which repeated pushed into the outside bands that don’t actually reach the band
As you can see in the image below there is five important information that you can pull. Let’s take it all one at a time:
- The price stays close to the outside bands and price is in a strong downtrend. This is a very bearish signal.
- Price fails to reach the outside band and then shots up very strongly. Suddenly failing to reach the bands can signal fading momentum.
- 3 swing highs with lower highs: the first swing high reached the outside band whereas the following two failed. It is a bearish signal.
- A strong downtrend where price stayed close to the outside band. It tried to pull away, but bears were always in control.
- Price consolidates sideways, not reaching the outside band anymore and the rejection-pinbar ended the downtrend.
So, they can give a lot of information about the trend strength and the balance between bulls and bears.
Bollinger Bands Squeeze
Bollinger Bands Squeeze is a great chart pattern that allows you to locate strong and profitable trade setups.
It happens when the market becomes too slow and there is a low volatility, the price moves sideways and the upper and lower Bollinger Bands become so close to each other.
It can be seen on all time frames easily, especially the shorter ones like 15 min.
The critical point is that a market is not going to remain calm and quiet forever, and this low volatility will be followed by a strong movement finally. This strong movement can be so profitable for the traders if they enter on time.
You can enter with a very tight stop loss and wide target because the movement that happens after squeeze is too strong. That’s why the Squeeze trade setups are perfect techniques.
Also, it is worth taking the risk with Bollinger Bands Squeeze because they are profitable due to show us the beginning of the strong movements and continued trends.
What is the best time to enter the market when Bollinger Bands Squeeze occurs on the charts?
You should take a position as soon as the market gets out of the range and starts moving strongly again.
I want to tell also about Bollinger Bands Squeeze that sometimes the market becomes too slow, but it is not moving sideways completely and the candlesticks row make an angle with the horizontal line while the Squeeze forms on the chart too.
It would be better to avoid this kind of Bollinger Bands Squeeze setups and wait for the ones that the candlesticks are moving completely horizontal.
The last thing I have to say about trading strategies. If you don’t take appropriate risks and don’t limit your risk with a reasonable stop loss and exit strategy you may lose your money with any trading strategy.
So, you should be careful during trading and think like a professional.