Forex Trading Technical Analysis using Bollinger Bands

Peaks indicated times of intense speculation and troughs indicated times of low interest in the market, when speculation was not high on people's agenda. 

~John Bollinger. 

What are Bollinger Bands?

Bollinger bands are technical analysis indicators, developed by John Bollinger that are used to determine the trend and the momentum of a trade. 

Technical analysis using this indicator is based on the fact that prices tend to stay within the upper and lower boundaries of a band.

How to insert Bollinger bands indicator into MetaTrader5

Step 1

Go to Insert >> Indicators >> Trend >> Bollinger Bands

Step 2

Customize the parameters of the Bollinger bands.

Period

The line in the middle of the Bollinger bands is usually a simple moving average set to a period of n days. The default setting is 20 days, however, that can be adjusted to suit an individual`s trading style.

Deviations

It measures the volatility of the price. Bollinger Bands are plotted at a standard deviation level above and below a simple moving average of the price enabling them to adjust effectively to price action

Apply to

Refers to applications of the period and deviations on the price. Variants available on this indicator are:

Close – based on close prices

Open – based on open prices

High – based on high prices

Low – based on low prices

Median Price – based on the median price, that is, (High + low)/2

Weighted close – based on the average weighted close price, that is, (High + low + 2* Close)/4

Previous indicator`s data- based on the values from the previous indicator inserted into the chart

Typical price – based on the average of the high, low, and closing prices for a given period (High + Low + Close)/ 3

How do Bollinger Bands work?

Imagine you are stretching an elastic rubber band. If the elastic band is stretched further and further apart, you will notice the bands will come closer to each other until they reach their stretching limit. When you let go of the elastic band on one end, it will return back to its original form. 

When analyzing price action using Bollinger Bands, you will notice that before a new trend begins, price consolidates for a while and the Bollinger Bands will contract as if being stretched. When the trend changes, the Bollinger bands expand and price breaks the middle Bollinger signaling a new trend. 

Applications of Bollinger Bands to Forex Technical Analysis 

You will never find fulfilment trading the markets if you don’t learn to appreciate and be satisfied with what you already have.

- Yvan Byeajee

The strategies below are best suited for intraday trading. They can be applied to both currency trading and synthetic indices trading. Please test these strategies before using them on a real money account.

1. Bollinger Bands and RSI

How to set up the strategy in Meta trader 5

Insert the Bollinger bands with the default settings shown below

Insert the RSI (Relative Strength index) with the following default settings

When to make a sell decision

 1. The RSI value must be at most below 60

2. The current price must be below the lower Bollinger band

When to make a buy decision

1.  The RSI must be at least above 40

2. The current price must be above the higher Bollinger band as shown in the image below

2. Double Bollinger Bands

This strategy makes use of two Bollinger Bands with the same period settings but different standard deviations.

Insert the first Bollinger Band with the default settings shown here.

Insert the second Bollinger Band with the following settings.

When to make a sell decision

 Price breaks below the middle bollinger and moves between the two lower Bollinger bands as shown in the image below

When to make a buy decision

Price breaks above the middle bollinger and moves between the two upper Bollinger bands as shown in the image above.

Summary

The trading strategy that you choose to use shouldn't be complicated. Patience is the key to becoming a successful trader. 

Do not anticipate and move without market confirmation - being a little late in your trade is your insurance that you are right or wrong.

-Jesse Livermore