Bollinger Band Indicator, produced by John Bollinger, measures the market volatility and provides much useful information. The Bollinger Band Indicator has three bands, which maintain value within 85% of their time limits:
– Simple Moving Average (SMA) in the middle (20 with default value)
– Lower band – SMA minus 2 standard deviation
– Upper Band – SMA Plus 2 Standard Deviation
For the Bollinger band in trading, the default value is (20,2). When the market becomes more unstable, the band will become wider and construct a mid-line by going away. When the market is slow and will become less volatile, the band will move closer together.
– Trend director
– Trend continuity or pausing
– Duration of market consolidation
– Duration of the upcoming major instability breakout
– Relative market tops and bottles and price targets.
How to trade with Bollinger Bands
Price moves in upper band channels – uptrend, lower – downtrend
It is very easy to identify the dominant price direction by simply answering the question: Which part of the Bollinger band is currently trading? If the price is in the upper channel – above the middle line – then we got a prevailing uptrend. If under the middle line – in the lower channel – we have a prevalent downtrend.
And if you missed the beginning of this trend, then the Bollinger band can help you in the trend with good risk to reward the roles on the pullback. Just look for the dip on the middle Bollinger band line and enter the trend direction.
Low volatility, after high volatility breakout
When the Bollinger band starts narrowing to that point when they create a visually tight range (there is no other way other than the eye), the signs of the upcoming rise in the situation instability break out of the market once is. Band, It is similar to a quiet time before the storm.
More time passes, while the price is narrow within the Bollinger band limit, the more aggressive and broad breakout is expected.
Price moves outside the band – trend continuity
When the price runs out and closes outside the Bollinger upper or lower band, then this means a continuation of the trend. Along with this, the Bollinger bands get wider as the instability increases. But this is not always straight forward: closing at some point outside the Bollinger band means the price will be reversed by exhaustion and the upcoming trend.
Bollinger bands are not able to identify continuity and reversal patterns alone and require support from other indicators, such as often RSI, ADX or MACD – in general, all types of indicators that vary from market to possibility of instability and trend Expose (speed, volume, market power, deviation, etc.)
Trend reversal pattern with Bollinger band
As a rule, after closing a candle outside the Bollinger band, Bollinger acts as the starting point of creating a trend reversal by closing a candle inside the band. However, this immediate trend is not 100% assurance.
Since long-term aggressive tend do not evolve, there will be more reversals than usual with cases of continuity, yet only filter signals can help other indicators accurately and spot the top and bottom of the false market.
Talking about the last, Bollinger bands are able to help double top and double bottom pattern recognition and trading.
W and M pattern with Bollinger band
A double top or M pattern is a sell setup. This is when the following sequence occurs with the Bollinger band:
– The price enters the lower band,
– pulls back towards the middle line,
– A new lower is made later, and it is lower over the lower band and it never touches it.
– When the price reaches and the middle Bollinger crosses the line, a setup is confirmed.
In fact, a very conservative trade approach requires a value to cross and close the Bollinger band on the other side of the line before changing the trend.
As you might have noticed, the middle Bollinger band line is only 20 SMA (default) line. This Simple Moving Average (SMA) is itself a widely used stand-alone indicator, which helps foreign currency traders to identify popular trends and confirm business signals.