Have your ever seen a market bounce off a certain level a number of times and then one day break through that level completely? Chances are, if you watch the market with any kind of regularity, the above scenario will not be unfamiliar to you.
In other words, when the market draws near to these levels, greater numbers may be drawn into trading. Bollinger bands use a statistical measure known as the standard deviation to establish where a band of likely support or resistance might lie. This is a specific utilisation of a broader concept known as a volatility channel. These lines, also known as envelopes or bands, widen or contract according to how volatile or or non-volatile the market is.
Bollinger bands are constructed by adding and subtracting a multiple of the standard deviation from a moving average. The most basic Bollinger bands interpretation is that the channels represent a measure of highness and lowness , for want of better terms. This is because the standard deviation increases as price ranges widen and decreases in narrow trading ranges.
This means Bollinger bands analysis inherently takes into account the volatility of the market. The versatility of the indicator allows you to tailor your trading with Bollinger bands to a variety of different trading approaches.
Best of all, the Bollinger bands indicator comes included as one of the standard tools in MetaTrader 4. We're going to look at three different types of Bollinger band trading.
The downtrend persists all the way through to the most recent part of the chart in October Psychologically, this can be tough and many traders find counter-trending strategies are less trying. Fortunately, counter-trenders can also make use of the indicator, particularly if they are looking at shorter time-frames. You can easily adapt the time-frame if you are swing trading or day trading using Bollinger bands. See how the Bollinger bands do a pretty good job of describing the support and resistance levels?
It's not precisely on the money, but the upper and lower bands do broadly match where the direction reverses. Recognising that this isn't an exact science is a key to understanding Bollinger bands and their use for counter-trending. When the market approaches one of the bands, there is a good chance we will see the direction reverse sometime soon. Remember, we said these levels are battlegrounds and eventually prices do breakout of such ranges.
In the chart above, I have added RSI as a filter to try and improve the effectiveness of the signals generated by this Bollinger band strategy. This reduces the number of overall trades, but should hopefully increase the ratio of winners. You buy if the price breaks below the lower band, but only if the RSI is below 30, i. It's a good idea in general to use a secondary indicator like this to confirm what your primary indicator is saying. If you want access to an even more comprehensive choice of indicators, take a look at MetaTrader 4 Supreme Edition.
The free MT4SE plugin not only grants you an extended number of indicators but also offers an overall enhanced trading experience. Another aspect of Bollinger bands technical analysis is the tendency of volatility to swell while following a channel of constrained volatility. John Bollinger, the technical analyst who developed Bollinger bands, theorised a rule of thumb that when the bandwidth reaches a six-month low, it presages an increase in volatility.
Bollinger's original analysis was using daily charts, but it can also be effective with shorter time-frames. Note the tight bandwidth that persists before we see the channels widen dramatically along with a breakout to the upside. Using Bollinger bands in combination with another MT4 indicator will let you double-check your thinking.
Therefore, why not practice in a risk-free environment with our demo trading account. Find out what else made the list by reading our article on the most important Forex indicators all Forex traders to know. Three Bollinger bands strategies that you need to know.
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