In forex trading, traders have a number of tools that can help in the decision making process. Bollinger bands are among the most popular ones. Bollinger Bans forex strategy can help the traders optimize the profits by buying low and selling high. The forex indicator also helps the traders avoid unnecessary mistakes when trading.
Bollinger Bands (BB) is an indicator used for at least two purposes, namely, to identify potential overbought areas or oversold areas and to determine market volatility. To do the analysis, traders need to pay close attention to the 3 lines, namely the upper band, the lower band, and the middle band (20-period Moving Average).
Use of Bollinger Bands Forex Strategy in Trading
To determine price trend
To determine the price trends, traders need to see the price position relative to the 20-period Moving Average. When the price is close to the upper band, then it is considered “oversold” (expensive). Meanwhile, it is considered “overbought” (cheap) when the price is close to the lower band.
When it comes to the Bollinger Bands forex strategy, traders mostly avoid buying currency pairs when it is oversold. Traders may take a position to sell, instead. On the other hand, buying decision may be necessary when it is overbought.
To determine market volatility
Determining entry or exit points can be challenging when the market is volatile. Therefore, traders need to identify volatility of the market. In the Bollinger Bands indicator, highly volatile market is evident when the distance between the two bands (upper and lower bands) is larger. On the hand, market volatility is considered low when the distance between the two bands is narrower.
Of course, the Bollinger Bands forex strategy will be effective when it is combined with other analytical tools. The Bollinger Band indicator is not decisive when used as a stand-alone analytical tool.