Forex Trading with Bollinger Bands

May 16, 2012 · Filed Under Forex trading system · Comment 

There are many different ways to trade forex and ultimately what you go with will depend on your attitude to risk and the size of your pocket. However, regardless of what approach you take, you will need a good system of analyzing the market. There are a whole host of systems and indicators available to use, but many people rely on tried and trusted methods, at least in part.

Bollinger bands have been around for a long time and are a key part of many traders` toolbox. A simple charting option, they measure volatility in the market and can help to identify periods when there is maximum and minimum volatility.

While many traders seek volatility to maximize profits, that isn`t the case with everyone, especially those with very short term positions. Swing traders look to capitalize on profits that are more easily predicted, which is not easy to do in volatile market conditions.

Very easy to read, Bollinger bands allow a trader to identify at a glance how much volatility there is in the market and whether the trend is increasing or decreasing. The chart uses two bands and when volatility is low, the bands contract, moving closer together but when volatility starts to rise, the bands spread out. There are many patterns to look out for when working with Bollinger bands, but two of the most useful are the bounce and the squeeze.

A Bollinger bounce refers to the typical price movement that sees the currency constantly move back to the middle of the two bands. This effectively allows the two bands to act as support and resistance levels, providing an indicator of when the price is about to reverse.

When a price reaches the top of a Bollinger band, the bounce means it is about to return to the center and will be dropping in value. The bounce pattern has a tendency to be the strongest over longer term trades and is particularly useful when there is no obvious overall trend in the market.

The Bollinger squeeze works very differently and helps a trader to identify when the market is about to break out of its range. The squeeze gets it name from the pattern seen on the charts, which can indicate that a breakout is about to take place. When the two bands contract and `squeeze` together, the price is usually getting ready to bust through either the support or resistance levels indicated on the charts. If the candle is moving upwards, you can expect to carry on ascending and if it is dropping, you can expect its nosedive to continue.

Using a 15 minute timeframe chart, it is usually possible to identify opportunities several times a week, although don`t expect to see them every day.

Bollinger bands are a very useful way to help you trade forex as profitably as possible, but they are just one charting option available. Most successful traders use around three charts to help them identify market movements, but any more can inhibit analysis by providing too much information.

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