Bollinger Bands is a price indicator that tracks the development of volatility. It was developed by John Bollinger and it is formed of a 20-day simple average in the middle and two other lines which are being calculated using the standard deviation of price related to the 20-day SMA. That forms a nice price channel.
As volatility increases, the indicator moves up or down, depending on the price direction. Bollinger bands are used for technical analysis and some of the most popular trading strategies are the M-tops and W-bottoms. In this article, we will show you how to use this indicator in order to be able to spot trading opportunities in the forex market.
In order to make you understand better the strategy, we will use an actual example from the chart. Below you can see a chart with the EURUSD on the 4h chart. As the end of 2017 was approaching, EURUSD was showing signs of bullish activity. That followed a year of good price performance, with the euro recovering 13% against the US dollar.
We’ve also plotted the Bollinger Bands indicator on the chart and we have spotted a W-bottom formation, which turned out to be successful. We’ve also drawn a support level at 1.1577, where the first leg down bottomed out.
After a consolidation higher, selling resumed, breached the 1.1577 and the buyers had quickly resumed afterward. What followed is a move larger than 350 pips. What is important to mention is that mindset plays an important role in this situations. Any beginner will sell after the support was broken. Instead what a professional will do is buy very low, not sell after a strong drop, considering that in the long term there was a bull trend in play.
You have to get rid of the fear of trading and manage to anticipate this kind of moves in the market. It takes confidence to do so, but with enough practice and persistence, you can manage to trade just like professionals do.
To summarize, this is one easy strategy you could use for Bollinger Bands trading. Also, in order to ensure a greater accuracy, you could mix it with other technical setups, as well.