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3 Popular Bollinger Bands Strategies You Should Use
John Bollinger created the Bollinger Bands, which are a technical analysis system used by traders to plot trend lines. These bands help traders know when to enter or exit a position to identify when a particular asset has been oversold or overbought. This indicator can be found on most trading platforms.
Since the Bollinger Bands measure volatility, they can adjust automatically when the market conditions change.
Bollinger Bands are usually plotted as three lines. These are:
- Upper band
- Middle band
- Lower band
The middle line is a simple moving average, while the upper and lower bands represent two standard deviations below and above the middle line by default. The standard deviation measures how far the numbers are spread out.
If the upper and lower bands have a standard deviation of one, it indicates that approximately 68% of the price moves have taken place within the bands. On the other hand, if the upper and lower bands have a standard deviation of two, this is an indication that approximately 95% of the price moves have recently occurred within the bands.
The Bollinger Bands Equation
Before moving to the strategies, it is essential to know the Bollinger Bands equation. The calculations are usually simple and easy to understand. The closing prices of the currency pair you are interested in is the first critical element used to create a Bollinger Bands Chart. You can use the last 20 periods that may be hourly, daily, or weekly.
After that, you need to calculate the standard deviation and add or subtract it from the upper or lower bands to determine the boundaries.
Some traders prefer using double Bollinger Bands to create their Forex trading strategies. These charts are similar to the traditional Bollinger Bands charts, but they use two standard deviation sets instead of one. So, you will have two lower hands below the SMA line and two upper bands above the SMA line.
With two additional Bollinger Bands sets in the chart, it becomes easier for traders to interpret the breaks below and above the outer lines. This also helps with technical analysis.
What Are The Three Popular Bollinger Bands Strategies?
The three Bollinger Bands Strategies include:
- Trend Trading
- Breakout Strategy
- Squeeze Strategy
1. Trend Trading Strategy
Identifying and following strong trading trends is one of the simplest methods of the Bollinger Bands' trading strategies.
Ideally, the trader analyses various currency pairs' charts and selects the securities where the price movements follow the upper or lower bands closely. The movements can indicate a strong trend in the market. So, the trader can either open long positions with currency pairs having uptrend signals or short positions having downtrend signals.
Whatever securities you choose, make sure they will be beneficial to your trade. This is because a slight mistake may lead to significant losses that may affect your financial stability.
2. Breakout Strategy
Typically, approximately 90% of the price actions are contained in the upper and lower Bollinger Bands. If the market closes below or above these boundaries, it is a sign of trend continuation. In case the spikes in the lower or upper bands are instantly rejected, this may be an indicator of a trend reversal.
With this trading strategy, traders can look for currency pairs that have overcome either the upper or lower bands. They should then open trading positions that can profit from the trend’s continuation. If the direction of the exchange rates changes later, it is better to close that position to be safe.
3. Squeeze Strategy
The Squeeze Strategy is the third Bollinger Bands Forex trading method you can use in your trades. This strategy aims at measuring the latest market volatility trends and forecasts possible changes. This is because the distance between the outer Bollinger Bands depends on the standard deviation. So, the bands begin to narrow when markets become less volatile, resulting in a squeeze.
If the outer band’s distance remains large for a long time, this may be a sign that they will eventually start narrowing again. So the trader can start preparing for lower market volatility.
The Bollinger Bands strategies can help you stay prepared for market changes, but they do not always guarantee success. This is because factors such as major economic events can disturb the pattern, which may cause significant losses or profits. So, it is best to combine both the fundamental and technical analysis for best results.
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