How to Use Bollinger Bands in Forex Trading

How to Use Bollinger Bands in Forex Trading

There are so many analytical tools that a forex trader may choose from in his analysis.

Having the knowledge of each tool is essential because each tool offers a unique opportunity in the market. You need to add as many tools of analysis as possible to your trading toolbox.

Each trading indicator is important in particular circumstances and environments, so you need to learn as much indicators as possible.

Although you may specialize in one or few tools of analysis, it is always important to have several options.

In this lesson, we will look at another important tool of analysis in Forex trading – the Bollinger bands.

How to trade forex using Bollinger Bands

Bollinger bands are forex trading indicators developed by John Bollinger. They are used to identify oversold and overbought conditions so that you are not faked out by false signals.

Forex traders often use Bollinger bands to determine whether the market is highly active or slow.

The lower and upper bands indicate the volatility of the market as market conditions change. See below.

how to use Bollinger bands in Forex trading

When there is little activity in the market, the Bollinger bands are close together.

When the price moves fast, the Bollinger bands are spread out wide as shown above.

What are Bollinger bands?

Bollinger bands are three lines plotted together to determine the volatility of prices in the Forex market.

These lines are: upper band, middle line, and lower band.

The middle line is a simple moving average, often using a 20-period.

On the other hand, the upper and lower bands are standard deviations above and below the simple moving average respectively.

How to apply Bollinger Bands to Forex Trading

Bollinger bands can be applied when the prices are either stable, trending up, or trending down.

There are two ways you can apply Bollinger bands to trade: Bollinger Bounce and Bollinger Squeeze

How to use Bollinger Bounce

Bollinger bounce occurs when the prices bounce off the upper or lower bands.

To start using Bollinger bounce in Forex trading, you should know that prices often tend to come towards the middle of the bands as show below.

how to use bollinger bounce in forex trading

In the figure, you can see that prices are bouncing off the upper and lower bands. In this case, the Bollinger bands can act as support and resistance levels.

Bollinger bands are often used when the market is ranging, and there is no clear trend. To trade Forex using Bollinger bands you will wait to see flat bands, and then:

  • Buy when the candlestick bounces off the lower band
  • Sell when the candlestick bounces off the upper band.

That is:

  • Sell when the prices close just below the upper band
  • Buy when the prices close just below the lower band

Remember, use Bollinger bounce only when the market is trendless.

How to use Bollinger bands when the market is trending

When the market prices are rising or falling, you use Bollinger squeeze. In this regard, Bollinger bands are said to be squeezing when the upper and lower bands are close together.

When this happens, it indicates that the market is about to break out.

how to use bollinger squeeze in Forex trading

If the Japanese candlesticks start to break out of the upper band, then it is time to buy.

On the other hand, if the prices fall below the lower band, then it is time to sell.

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