Bollinger Band trading strategies and Patterns
6 months ago forexsimulation 0
Forex traders use a wide range of strategies and patterns with Bollinger bands. Read along to find these out.
A double bottom is a technical analysis charting pattern that defines a power reversal and a difference in trend from previous dominant price action. This pattern indicates the drop of an index or stock, a bounce back, another drop either to the same or a similar level as the initial drop, and a final bounce back.
An instrument’s price moves with considerable volume, sharply lower, and close below the inferior Bollinger band. It then bounces back higher close to the middle band and falls again lower before closing nearly within the lower band.
The double bottom shows that downward pressure has decreased. There will then be a switch from sellers to buyers. Usually, the subsequent price movement is a robust move upwards from the second low. Forex traders may want to go high targeting the upper or middle band.
A double bottom pattern is ideal for evaluating a market’s short to long-term perception. A longer time frame between two lows in the pattern increases the chance of success in the chart pattern. According to experts, three-month duration would be ideal for the double bottom pattern lows. Using weekly or daily data price charts would be better when evaluating markets for the double bottom pattern.
Reversals (Oversold and Overbought Strategy)
In this strategy, traders monitor signs of reversal of an instrument’s price trend. For instance, the price could rise above the top Bollinger band but end near the low band during the break. This could be a sign that the trend will change in the short term. A trader may assume a short position aiming at the middle band. Again, the price could fall below the lower Bollinger band but end near the top for the break. This trend can suggest that the trader could go higher, aiming at the middle band.
Bollinger Bands Squeeze Strategy
A squeeze happens when prices that have been moving start fluctuating in the opposite direction under a compact consolidation. A forex trader can recognize when an asset price is consolidating because the lower and upper bands grow close together. This action indicates a decrease in asset volatility.
After some time of consolidation, the price usually makes a big move in any direction on high volume. Advancing volume is an indication that traders expect the price to keep moving along the breakout direction. Once the price breaks via the lower or upper band, the trader can either sell or buy the asset. Usually, traders place a stop-loss order over the consolidation at the opposite part of the breakout.
When is the Best Time to Set Bollinger Bands?
Traders can set Bollinger bands in various timeframes and adjust to a range of trading strategies. For example, Bollinger bands can monitor movements on a monthly, weekly, daily, or hourly chart. A trader seeking long time frame moves on an asset’s price can choose to set Bollinger bands on a weekly or monthly chart. A short-term trader, however, can choose to set Bollinger bands on a 5-minute chart. It is worth mentioning that there is no particular timeframe that is ideal for Bollinger bands. The time frame you use depends on the trader’s strategy.
Are Bollinger Bands Effective?
While Bollinger bands are effective they come with various limitations. They rely on an asset’s simple moving average, which utilizes previous data points. Due to this fact, the bands usually react to price fluctuations and do not predict them. Rather than being predictive, Bollinger bands are reactive.
Bollinger bands are likely to generate false signals. For instance, a false breakout happens when an asset’s price surpasses the trade entry spot. It indicates a trade but then goes back in the opposite direction resulting in trade loss.
Forex traders need to understand that ordinary settings hardly work for all strategies. Long term forex traders can opt to use a larger number of high-level deviation and time frames. Short term can opt to use a low standard deviation and time frame. Seeing that Bollinger bands have limitations, traders should use them in collaboration with other technical analysis tools.
Before adopting Bollinger Bands ensure you understand how they work. Only then with they help you achieve your goals.