How To Trade With Bollinger Bands Indicator

Bollinger Bands

For anyone to be successful in the business of currency trading, the main goal has not changed and it is hinges around investors buying an instrument when it is low to sell at a high price or buy when high to sell at a low price. A lot of trading strategies have been employed in trying to go about this.

The Bollinger bands have remained one of the most popular technical indicators for currency traders, stock traders, bonds, etc. A lot of investors out there use Bollinger bands to determine overbought and oversold conditions, while they sell an instrument when the price touches the upper Bollinger and buy when price touches the lower Bollinger band. This method works well during ranging markets when price oscillates within the walls of the upper and lower Bollinger bands.

The Bollinger bands are made up of three bands referred to as the upper band, the lower band and the center band. The default setting of the middle band which is also a simple moving average is set at 20 periods, with the lower and upper bands representing chart points that are two standard deviations away from the middle band. A typical Bollinger band can be seen on image below.

How To Trade With Bollinger Bands Indicator

How to Trade the Bollinger Bands

Buying and Selling on the Upper and Lower Bands

Investors start by identifying potential overbought and oversold areas in the market. In some instances traders would take a close outside the upper and lower bands as a buy and sell alert. The creator of this indicator John Bollinger recommends that this indicator be used for confirmation of other technical indicators. Besides the fact that investors do prefer confirming alerts with more than one method, with Bollinger bands prices which stay or close outside the upper and lower bands can employ a strong trend (and traders would not love to be caught in reversals). This is why if these trading method must be adopted, it should be during range bound markets.

Our trade example is clearly shown on image below, with a 1-hour EURUSD chart.

Buying and Selling on the Upper and Lower Bands

Bollinger Band Contractions

This is a popular method that investors employ in trading the Bollinger bands. In the currency market, we get a lot of large breakouts during periods of low volatility when the Bollinger bands contract. The basic rule that investors follow is to trade on a break of the upper or lower Bollinger band after a session of contraction or low volatility. Care must be taken when applying this trading system as some of the initial move usually fakes out. This is shown with an example on image:

Bollinger Band Contractions

Conclusion

All opened trades should be managed according to your risk parameters and trading methods. It would be wise to always review your size of trade before entry. Multiple positions could mean using small lots on the positions, so that the overall shared risk on ths equity still remains balanced.

Bollinger Bands MT4 Indicators