Bolinger Bands: A Tool All Forex Traders Should Know

Bolinger Bands: A Tool All Forex Traders Should Know

To succeed as a forex trader, there are many tools at your disposal. All you need to do is learn how to use them.

One of the most common tools used by successful traders is the Bolinger bands. They are part of an arsenal of tools used by forex traders to help them predict market movement. Correct predictions enable traders to make the right trading decisions that result in profits.

Bolinger Bands Definition

Bolinger bands is a chart indicator used to track price movement and volatility over time.

John Bolinger came up with the formula for Bolinger bands in 1980. The mathematical formula used to calculate Bolinger bands is a bit difficult. However, most trading platforms will calculate this for you automatically.

On your computer monitor, Bolinger bands are shown as three bands plotted on a price chart,  hence their name. The first band represents a 20 day moving average plus two standard deviation points of the price of the currency pair in question. The lower band represent the moving average minus two standard deviation points.

Using Bolinger Bands

When using Bolinger bands to make your trading decisions, you need to look at the distance between the top and the lower bands. The further they are from each other, the more volatile the market is.

The narrower the bands, the more stable the market. Thus, the best time to get into a trade is when the bands are narrow.

Sometimes, when you use Bolinger bands, you will find that you will often get double bottom results. These reflect the likelihood of a market movement change and thus a good time to start a trade.

Benefits Of Using Bolinger Bands

Understand The Trend

Bolinger bands are useful to traders as they help them to see the market trend.   When prices on the Bolinger bands are close to the upper band, it indicates that the market could be overbought. As the prices come closer to the lower band, the trader can then see that the market is or close to oversold.

Test Market Volatility

As the bands move away from each other, on the Bolinger bands this indicates increasing market volatility. Whereas, as the bands come closer to each other, this indicates a much stable market that traders can profit in.

Helps To Indicate When To Enter The Market

When you use Bolinger bands, they can show you when the market is stable enough to trade in. When they indicate market volatility, as a trader, you should avoid to trade. Bolinger bands help traders to make the right decison when entering the market on the type of trade that they will place to make a profit.

Cons Of Using Bolinger Bands

Cannot Be Used On Their Own

Like many other indicators, Bolinger bands cannot be used on their own. You need to combine it with other analysis tools to get the best results and time to enter a trade.

Difficult To Predict The Movement of The Market

One advantage of Bollinger bands is that they can show price extremes that occur before the market breaks out. However, Bolinger bands cannot predict the direction in which the prices re going to move.

For this reason, you will need a different analysis tool to indicate the direction in which the market moves.

Failed Settings

When yoiu use Bollinger bands to trade, you will have settings for your trade. Often traders set out guidelines for a particular trade. Many times the set guidelines will not correspond to the Bolinger bands. And the result of the trade will be unexpected.

To solve this problem, traders will need other analysis tools. Tools that will ensure that they can get the result of their settings as set.

Conclusion

Bolinger bands are highly accepted and used by traders in the market. Traders use them to determine how high or low the price of a currency pair is. And, whether they should set up a trade in the currency pair.

For the best results when using Bolinger bands, a trader should know how to use it with other tools. This ensures that you can get a correct analysis and prediction of the market movement before you set up your trade.