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How to Use Bollinger Bands

June 1, 2011 · 3 comments

in Forex Trading

While many indicators can be used when trading the Forex market, sometimes the simplest indicators are the most effective. Bollinger bands are one of those indicators that is simple, but at the same time, can help you make important decisions when trading Forex. Here are the basics behind Bollinger bands and how you can use them to make money.

Accessing Bollinger Bands

To access Bollinger bands, you can use the popular Metatrader 4 platform that is available with most Forex brokers. Open up your Metatrader 4 platform and then open the currency pair chart of your choice. Up at the top of the screen, you’ll need to click on “Insert” followed by “Trend” and “Bollinger Bands.” The bands will then appear in your chart.

 What Are Bollinger Bands?

Once you insert the indicator in your chart, you’ll notice two new lines. You still have the price line or candlesticks, depending on your preference, and then you will see a new line on each side of it. The line gets wide at some points and narrow at others. The general purpose of this indicator is to tell you the amount of volatility and action in the market at any given time. When the bands constrict tight around the price line, it means that the market is not really moving or very volatile. When the market starts to move and sees some more action, the bands expand and become wider.

Bounce and Squeeze

When trading with Bollinger bands, there are two specific formations that you’ll need to be aware of. The first one is called the Bollinger bounce and it occurs frequently when the bands are not necessarily close together. With this phenomenon, the price of the currency pair usually goes to one of the bands and then back towards the middle. For example, if the price was down by the bottom of the two bands, you would usually see it reverse and go back up shortly after. The second scenario is referred to as the Bollinger squeeze. With this scenario, the two bands squeeze tightly together around the price. When this happens, it usually leads to a price breakout in the near future. When the price moves towards one of the lines and breaks through it, you can feel relatively confident that it will continue moving in that direction.

Integrating Into Trading

Bollinger bands are a solid indicator and they are widely available to every trader who gets involved with Forex investments . While they are not going to be right every time, they can help give you an edge in your trading. Combine them with other indicators, such as the MACD to improve your chances of being successful.

 

Authored by Luke Arthur

Luke Arthur is a Forex trader and creator of the site Forex Trading Rookie. If you are a beginner and you need some clarification on software, trading strategies and Forex basics, this is the place for you.

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