John Bollinger invented Bollinger Bands. This technical indicator creates a channel around an asset’s price movement, and relies on a moving average, and ordinary deviations. Traders can leverage Bollinger bands to determine the direction of a trend, monitor volatility, and identify potential reversals. All these factors can help traders make informed trading decisions if they follow some basic guidelines.
Understanding Bollinger Bands Basics
Bollinger bands display three lines on a forex trader’s chat. The central indicator line is the SMA (Simple moving average) of an asset’s price, while the upper band represents the SMA, and two ordinary deviations.
The lower band refers to the SMA but without the two ordinary deviations. Bollinger bands indicate when instruments are within the oversold or overbought category. When the asset’s price fluctuates towards the higher band, this shows that it has been overbought. Should the price fluctuate to the lower band that would indicate that it has been oversold.
Forex traders can use Bollinger bands to evaluate volatility. When a trading period is calm the bands often narrow. However, when the prices become volatile, the bands widen. Bollinger bands are among the popularly used technical tools. When traders combine them with other indicators, they can gain profit from oversold and overbought market conditions.
Bollinger Bands Day Trading Uptrends
Bollinger bands are ideal when it comes to evaluating an asset’s uptrend and downtrend. Traders can use this information to make trading decisions. Here is how you can utilize Bollinger bands in an uptrend.
If the price is experiencing a robust uptrend, it will nearly touch or rise to the top band. Failure to do that indicates that the uptrend is losing power. Remember, prices often drop during an uptrend, an occurrence known as pullbacks. If prices move powerfully during an uptrend, the pullback lows occur above or close to the moving average or middle line.
While the pullback does not have to linger near the central line, it will be stronger if it does. If the price is experiencing a powerful uptrend it should not hit the lower band. Should it do so, then that becomes a warning indication of a possible reversal.
Bollinger Bands Day Trading Downtrends
Forex traders can leverage Bollinger bands to evaluate an asset’s magnitude of a downtrend, and determine when the instrument is experiencing an uptrend or reversing. They can then use this data to make informed trading decisions. Here are some guidelines to help traders utilize Bollinger bands during a downtrend.
When the price is experiencing a powerful downtrend, it will hit or linger within the lower band in impulse waves lower. Failure to do so is an indication that the downtrend could be losing power. Even in a downtrend, prices are likely to recover for specific time frames referred to as pullbacks.
If prices experience a robust downtrend, then pullback highs occur below or close to the central line. While the pullback does not have to remain near the central line, doing so indicates selling power. When prices are experiencing a robust downtrend they should not hit the upper band. Doing so could be a warning signal of a potential reversal.
Leveraging Bollinger Bands to Determine Trend Reversals
Here is how traders can identify reversals.
When the price is experiencing an uptrend and hitting the top band continually without hitting the lower band, or when prices touch the lower band, that could be an indication that a reversal is initializing. If the price recovers chances are that it will not hit the top band, or even reach the previous price high.
When the price is experiencing a downtrend and touching the lower Bollinger band continually without hitting the upper band. When such happens, it could be an indication that a reversal has started. If the price drops again, then chances are it will not hit the lower band or the previous price low.
While Bollinger Bands are powerful trading analysis tools, they come with various limitations. Consider combining them with other indicators to succeed in your trading career. This tool is ideal for helping traders remain on the right side of a trend and identifying possible reversals. Remember, to succeed in forex trading, you have to research consistently, practice, and improve your skills on the go