Bollinger bands how to use this toolbox.
Keep the spirit, in the previous chapters we have learned many things about forex.
From basic lessons to advanced levels, and now we will add new lessons about toolbox in forex trading analysis.
A toolbox is a tool needed to help traders to do a market analysis.
Such as you will build a house, you need equipment such as hammers, nails, wood, sand, stone and so on.
Each tool has its own function which is basically different from the others.
Similarly in the forex, there are many tools that can be used by traders to help analyze the forex market.
To add to your toolbox collection, we will study some indicators one by one.
By understanding the many types of toolbox you can adapt to market conditions and adjust the toolbox as needed.
But if you are only going to be a specialist, one toolbox is also cool, you can become an expert using moving averages, or experts using Fibonacci only.
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Bollinger band explained
One toolbox that many traders use is the Bollinger band, indeed we have discussed this indicator, but here we repeat this lesson because after all this is a very popular indicator and many traders use this toolbox.
Introducing below is a picture of the face of John Bollinger, we deserve to thank him because his work contributes to helping traders both stocks, forex, or cryptocurrency.
First, we will start with the function of the Bollinger band indicator.
The basic function of this indicator is to measure price volatility when the market is quiet, both upper band and lower band lines are close together, but when the market is busy, the upper band and lower band lines will expand.
Take a look image below, you will get the point
The image above is an illustration of the upper band and lower band lines, actually, when you plot the Bollinger band indicator, three Bollinger band lines will appear, where the centerline is the middle band.
When prices move flat. prices often bounce off the upper band and lower band lines, and when prices move trending then the upper band and lower band lines eventually expand.
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Bollinger band formula
Maybe how to calculate the Bollinger band is not so important because in practice when you attach this indicator everything will automatically draw a Bollinger band line.
How to calculate it actually using a moving average, this we have mentioned before.
Generally, to calculate Bollinger band use a 20-day simple moving average (SMA) for the middle band.
Calculate the upper band by taking the middle band and adding twice the daily standard deviation to that amount.
And the calculation of the lower band by taking the middle band minus twice the standard daily deviation.
Here is the formula of Bollinger band
Upper band =MA(TP,n)+m∗σ[TP,n] Lower band =MA(TP,n)−m∗σ[TP,n] Description MA = Moving average TP (typical price) = (High + Low + Close) ÷ 3 n = Number of days in smoothing period m = Number of standard deviations σ [TP,n] = Standard Deviation over last n periods of TP
How to use Bollinger band
Bollinger bands are a very popular trading technique among traders, both stock or forex and cryptocurrency.
How to use this indicator is generally, if prices move near the upper band then many traders believe this is an overbought area.
Conversely, if the price move closer to the lower band area, many traders believe this is an oversold price.
John Bollinger himself made 22 rules that need to be followed when using the Bollinger band indicator.
The Bollinger band bounce
Bollinger band strategy bounce by utilizing the upper band and the lower band as dynamic support resistance.
Why is using this Bollinger band also can use as dynamic support and resistance?
This is because in the calculation it uses a moving average, so this includes indicators that can be used to determine dynamic support resistance.
In this case, the upper band as dynamic resistance and the lower band as a dynamic support.
The middle band will also be involved later, especially as a target.
Prices tend to bounce back to the middle band after reaching the upper band or lower band.
This condition is what you use to look for entry points.
The strategy is you look for buy levels in the lower band area or look for sell levels in the upper band area.
You can determine the target by looking at the middle band.
The strategy of using Bollinger bands as a dynamic support resistance area is usually traders use the market in ranging conditions.
Using a long timeframe is better at avoiding analysis error bias than using a short timeframe.
But as many have said that forex price movements are not like mathematical calculations which are an exact science, so using a Bollinger band bounce strategy also needs to pay attention to risk, you can place a stop loss by looking for the nearest resistance support area.
Bollinger band squeeze
Bollinger bands can also trade when the market is trending, we will see an example.
Before trending, there are usually signs that the upper and lower bands are close together, limiting moving averages, this is a condition where the Bollinger band is called Squeeze.
This marks a period when market volatility is low and is considered by traders as a potential sign of increased volatility in the future with the possibility of trading opportunities.
Conversely, the wider the distance of the moving band, the greater the possibility of a decrease in price volatility in the market, so that again the price is likely to be lower volatility.
However, this condition is not a trading signal.
Bollinger Bands do not provide an indication of when changes can occur or in what direction prices will move.
The image below is an illustration of the Bollinger band Squeeze.
The picture above shows that the two bands are close together or squeeze, which indicates that volatility is low.
In this condition, traders will think that this condition can be said to be a sideway and will eventually breakout.
If after this condition ends you think the price will go up, then that’s right, because then the price shoots up.
Bollinger band breakout
If you notice that about 90% of the price movement occurs between the two bands.
Every price movement that crosses the upper band or lower band is a big event that many traders call a breakout.
Most traders will probably think that when the price crosses one of the bands.
Marked by the expansion of both bands, this is a buy or sell signal.
Of course this can be done, but actually the breakout is not a trading signal.
The mistake of most traders is to believe that the price reaching or exceeding one of the bands is a signal to buy or sell.
Breakout does not provide clues about the direction and level of future price movements.
But if you use Bollinger Band Breakout as a trading signal, you should place a stop loss in anticipation of the level of risk that is ready to bear it.
Bollinger Bands are a popular indicator and many traders use this indicator, but the use of this indicator is not a standalone trading system.
This indicator has the main function to measure price volatility.
John Bollinger suggests using it with other indicators that have no direct correlation with this indicator.
By combining indicators using other indicators it will provide information as a filter and a confirmation signal in trading.
Because these indicators are calculated from simple moving averages, they weight older price data equal to the latest, which means that new information can be diluted by outdated data.
And the use of SMA 20 as the default period and 2 standard deviations is somewhat arbitrary which might not work in all market conditions.
Traders must adjust their SMA and their standard deviation assumptions and monitor them.
But there are some traders who use two Bollinger bands with different standard deviations.
And this is the art of forex trading, one indicator can be modified to be a toolbox that is useful in market analysis.
The main point of Bollinger bands is to help traders achieve success.