As a new forex trader, your ability to make money in the markets largely depends on whether you can reliably predict trends and price movements. To this end, formulating strategies that take advantage of data, and using the right technical indicators can go a long way towards improving your odds of success. And one of the most reliable and widely used indicators are bollinger bands.
Bollinger bands are great for new traders simply because they are easy to understand. And given that they are popular, someone who is new to trading will have an easier time finding useful information and a great community of traders who can come in handy in helping to incorporate into their strategies. The following are some of the ways through which you can easily use bollinger bands to detect opportunities and take advantage of them as soon as they arise.
Using bollinger bands to detect strong trends
One of the best opportunities that new traders have occurs during trends. This is so especially in cases where there is a strong trend. This is because reliably predicting price movements for trending currency pairs is easier, and so this predictability reduces the risks to which you are exposed.
Bollinger bands typically have three bands. But for strong trend detection, the lower and upper bands are the most useful. Therefore, when analyzing the price movements of currency pairs, all you have to do is to pay attention to prices that are closer to either the lower or the upper bands. If a currency pair’s price movement is close to either the upper band or lower band, then it means that you have a strong trend and you can thus take the appropriate positions on the reliable assumption that there is a strong upward or downward trend.
Using bollinger bands as a preparation tool
As a beginner, you will have to choose whether to focus your trading strategy on volatile markets or once which are steady. This is because strategies that are great during periods of volatility in a currency pair, are not always suited for nonvolatile markets. To this end, bollinger bands can come in handy.
Generally, the distance between the upper and the lower bands do not stay the same. They vary depending on how volatile the currency is. When the price movement is volatile, the distance between the bands tends to be wider. And when the market is less volatile, the distance tends to be shorter.
Therefore, when the distance is smaller — what is commonly referred to as a squeeze — chances that it will eventually widen increase. This is so especially if the distance remains small for an extended period of time. As a trader, this narrowing usually means that you should prepare for a volatile market. The same applies to situations where the bands are wide. Since the distance will eventually start narrowing, this is an indication of a non-volatile market being around the corner and so preparing to start using strategies that are favorable tos such markets may be ideal.
Taking advantage of bollinger bands breakouts
You can also opt to stick to taking trading positions only once the prices break above or below the bollinger bands. This can be a reliable way of identifying trading opportunities because when the price movement breaks through the bands, it usually signifies a continuation of the trend. However, it is important to note that if the breakout is immediately rejected, then the likelihood of a trend reversal occuring is higher. And in such a case, you can take a trading position that bets against the existing trend.
Bollinger bands can be great at helping you figure out when to actually take trading positions. However, it is important to note that bollinger bands are meant to help you analyze your data and make predictions. As a result, it is possible to make the wrong conclusion, even when relying on bollinger bands. As a trader, it is therefore advisable that you use Bollinger bands in conjunction with other technical indicators in order to make more reliable predictions. You can also go a step further when it comes to protecting your portfolio from the unpredictability of the market by shielding it from excessive losses through the use of stop orders.