June 10, at 3: If a stock doesn't go up, don't buy it paraphrased from Will Rogers. However, false breakouts from both chart patterns and congestion regions are common, as in any market. I know that, and I understand. October 20, at 7:
What Is the Closest Way to Become a Profitable Forex Trader?
These days there are many different indicators available for trading the Forex market. And it seems every few months or so a new trading indicator arrives on the scene.
But many times, these new indicators are just some variation of the classical versions. Today we will discuss one of the most robust trading indicators that has stood the test of time. This is the Bollinger Bands indicator. We will discuss the basic elements of this indicator, and I will introduce you to a few profitable Bollinger Band trading strategies.
The Bollinger Band is best described as an on-chart volatility indicator. It consists of upper and lower bands which react to changes in volatility.
The two bands wrap around the price action at the upper and the lower extremes. When the volatility of a given currency pair is high, the distance between the two bands will increase. When the volatility of a given currency pair is low, the two bands begin to compress together. The indicator includes a standard period Simple Moving Average which could be used to set entry and exit points of trades. As we noted, the Bollinger Bands trading tool consists of three lines — upper band, lower band, and a middle line.
The middle line is a period Simple Moving Average. It is calculated by summing the closing prices of the last 20 periods and then dividing the result by The upper line is calculated with a period SMA of the price action and its standard deviation. The lower band is calculated the same way, using the period SMA and its standard deviation. The default standard deviation used is 2.
Although it is a primarily a volatility indicator, the Bollinger Bands is quite useful in discovering support and resistance areas. There are a few signals that can be generated using the Bollinger Band. These signals respond to different price attitudes on the chart. When the Bollinger Bands are close to each other, then the trading indicator is conveying to us that the volatility of the Forex pair is relatively low.
In this manner, the trading volumes are typically low as well, and the pair is said to be consolidating or ranging rather than trending.
In most cases, we should avoid trading within very tight price ranges, because they provide significantly less profitable opportunities than during trending phases.
The image below shows a classical Bollinger Bands Squeeze. An important concept to understand in forex trading is that prices will typically move from periods of low volatility to periods of high volatility and back again. As you see, after the squeeze, the prices breaks out to the downside, and enters a sustained downtrend. The Bollinger band squeeze breakout provides a good premise to enter the market when the price extends beyond one of the bands.
This would provide for support in favor of the range bound market coming to an end and the likelihood of price entering into a new trend phase.
As a result, a bullish bounce could occur, creating a long trading opportunity. Think of this as a hidden support level based on an extreme volatility reading.
However, if the price starts falling quickly at the lower band instead, and the distance between the two bands continues to increase, then we must be careful of entering a long trade. When the bands are expanding and we see strong price momentum below the lower band, this is a clue that a bearish bias should still be in play.
The same scenario is in force but in the opposite direction. We look at the upper band as a hidden resistance level based on an extreme volatility reading. However, if the bands expand and the price starts closing candle after candle above the upper band, then we expect further bullish expansion. The breakout in the Bollinger Bands Moving Average is a confirmation signal, which usually comes after a price interaction with the bands. If the price bounces from the upper band and then breaks the period SMA in bearish direction, we get a strong short signal.
If the price bounces from the lower band and breaks the period SMA upwards, then we get a strong long signal. In this manner, the period SMA breakout can be used to set exit points after entering a Bollinger Bands trade.
The black arrow points out a Bollinger Bands squeeze. The red arrow shows the price trending while breaking the lower Bollinger Band and the green arrow shows up trends on the upper Bollinger Band. Now that we are familiar with the structure and the signals of the Bollinger Bands, it is now time to shift our focus a bit, and take a look at a couple of trading strategies that can be incorporated using the Bollinger Bands.
One reliable trading methodology utilizing Bollinger Bands, is combining Bollinger Bands and Candlestick analysis. Basically, you could go long after the price touches the low Bollinger Band and then closes with a reversal candlestick pattern. And on the flip side, you could short the Forex pair when the price hits the upper band and then forms a reversal candle.
For this setup, you should place a stop loss order beyond the reversal candlestick. I prefer to close half of the trade when the price reaches the Bollinger Bands Moving Average. We can stay in the trade for the other half of the position to take advantage and any prolonged price move.
And so in this case, if the price keeps trending in our direction, we can use the Bollinger Bands Moving Average Breakout as an exit signal.
Start with small and increase in steps so you are comfortable with following the rules. I plan to give this indicator a try. Kevin I reside in Sacramento too, and always like connecting with like minded folks. Will update in month with results. Your email address will not be published. Long entry Setup Figure: Wait for at least three yellow lines above the top of the indicator. At least three candles should be close above the red line of the indicator.
The aggressive trader can take buy entry directly at the opening of the fourth candle. On the contrary, the conservative trades can wait for the price to retrace back to the yellow lines to enter into the long trade. Stop loss should be placed right below the red lines of the Pro EMA gain indicator candle. In the above figure at the point at the point An aggressive traders went long and at point B the conservative traders entered long.
Take profit area should be determined by the market key resistance level. Make sure that your potential takes profit is at least three times the amount you are risking. Wait for at least three yellow lines below the bottom of the indicator. At least three candles should be close below the red line of the indicator.