Bollinger Bands - is one of the indicators of the Forex currency market, which appeared in the 80s. The tool was a real discovery that took technical analysis to a higher level. The creator of the indicator was John Bollinger. The algorithm of the instrument is to determine when the asset is undervalued or overvalued. Since the indicator refers to trending instruments, it helps determine the direction of price movement. Thanks to the precise identification of areas of undervaluation and overvaluation, you can find the turning point of the movement.
A bit of history
John Bolinger is a well-known trader in the modern world and concurrently is the founder of the company Bollinger Capital Management, which specializes in money management. Bollinger Bands, and this is how the name of the indicator sounds in English, it can be considered a real find for every trader. With the help of a situation analysis tool, you can clearly set goals, as it analyzes market volatility. The channel forming around the moving average is flexible and constantly follows the price. All brokers, including Forexstart, offer Bollinger Bands in the public domain. This tool is already built into the trading terminal, and for its use no additional payment is required.
Tool description
Bollinger Bands - these are, in fact, three moving averages that are superimposed on the price chart; the construction of the indicator is not performed in a separate window. The middle lines cover the movement of quotes on both sides, thereby creating a volatility corridor. It was the appearance of the instrument that led to the appearance of its second name - “envelope”. Moving averages are used simple, with a standard deviation of +2 at the upper boundary and - 2 at the lower boundary. The settings are basic, and, depending on the vehicle, each trader can upgrade them. In addition to the level of deviations, in the indicator settings you can change the period and shift. There is an option indicating which price the indicator applies to. The standard deviation value indicates the volatility of the trading instrument at a given time. With increasing volatility, the Bollinger Bands expand, the range between the extreme edges of the corridor increases. With a decrease in market activity, the corridor will narrow.
How does the change in the period affect the behavior of the indicator?
A period is a time period corresponding to a certain number of candles, which is taken into account by the indicator when building a channel. The default value is set to 20. When it decreases, the channel lines become more broken. The price begins to actively break through the boundaries, which leads to the appearance of a large number of false signals. The reaction of the lines themselves to price movement is activated. An increase in the period leads to smoothing of the channel, to an increase in the distance between the upper and lower lines. The indicator begins to respond slowly to changes in value. Due to the fact that the channels will be broken much less often, the number of trading signals will decrease. In this case, the strength of the signals themselves will become much greater.
What are the changes in deviation indicators?
Deviation is an indicator that determines the distance of the upper and lower boundaries from the central moving average. With increasing standard deviation indicators, the distance from the upper boundary to the center increases. The number of incoming signals is reduced. The reduction in deviation brings the channel borders closer to the center, which leads to the growth of false trading signals. By experimenting with the standard deviation, you can choose the optimal parameters for the highs and lows that the price should achieve for a breakthrough.
Primary orientation and important points
Initially, the indicator was not created for the Forex market. Its main purpose was to analyze the situation in the stock market. Later, the tool began to be actively used in the foreign exchange market and introduced into binary options trading strategies. The indicator author himself used it on the daily chart. Hence the conclusion that the use of the indicator on other timeframes requires the installation of other parameters. The use of lines with volatile pairs while decreasing the period will cause a huge number of false signals. Most professional traders do not recommend changing the standard deviation up. As practice has shown, in 90% of situations, the price remains within the corridor. Of the settings, the moving average period most often changes. Everything else is left with standard values.
Indicator Features
Binary options trading strategies, in fact, like most strategies adapted for the foreign exchange market, are developed on the basis of the features of this analysis tool. It is especially necessary to carefully monitor the periods when prices go beyond the extreme edges of the corridor. There is a high probability of two scenarios. Both the continuation of the movement and its turn are allowed. This signal must be reinforced with other tools of the trading system. In a number of situations (of the order of 75%), if an active price movement begins at one of the faces of the channel, it will certainly continue to the opposite side of the same channel. Another feature of the indicator is related to the situation when minima and maxima are formed outside the channel. If the next candle takes a place in the range of motion, we can consider the formation of the opposite signal. If the Bollinger lines sharply narrow and are in this state for a certain time, it is worth talking about the beginning of a new trend with a strong primary impulse. Subsequently, it will be possible to observe a strong jump in volatility. A dubious feature is the prevention of the formation of more than 4 candles outside the corridor. After reaching a peak, the price starts a correction. This feature is not taken into account if important economic news takes place.
Practical use
Bollinger Bands belong to the category of trend indicators. Their main goal is to determine the current direction of movement in the market. According to theory, this tool is not intended to determine the exact entry and exit points. At the same time, many traders have found very effective use of the indicator in the process of monitoring its work. The simplest signal format is formed when a middle line is broken in any of the directions. When breaking through from the bottom up, you can consider shopping. The opposite situation indicates preparation for sales. In addition to the priority entry point, Bollinger Bands for binary options, for other types of markets, help to set goals. As soon as price quotes reach the upper or lower border of the channel, depending on the direction of the trend, it is worth worrying about closing trading positions.
One of the most aggressive strategies
Some aggressive traders also cannot do without such a tool as Bollinger Bands. The strategy is based on opening deals at those moments when the candles go beyond the channel. The danger of such decisions is due to the fact that several falling or growing candles can form simultaneously outside the channel. Thus, until the trend reversal, you will have to sit out at a loss for some time. It is much more practical to build dynamic support and resistance levels based on indicator indicators . Border accuracy remains at a fairly high level. The use of the tool is effective during a sharp narrowing of the corridor. It’s worth acting by analogy with the use of Bill Williams Alligator. The longer the corridor is in a compressed state, the stronger the movement will ultimately be.
An independent and additional tool for trading
Bollinger lines can be used in trading both independently and as an additional tool in technical analysis. Combining the latter with candlestick patterns (Price Action) is effective. It is relevant to consider formations near the upper and lower boundaries of the channel. The simplest double signals can be pin-bars or inverted candles, hammers, which will clearly indicate a trend reversal. Trading on Bollinger Bands can be effective when combining its signals with the signals of the MACD indicator. A decrease or increase in the histogram with a parallel increase in the curved lines of the channel is already a powerful signal. The presence of divergence or convergence may indicate a future trend reversal. A confirmation signal from Bollinger Bands will open a deal at the right time.
Technical Analysis Tool Benefits
Like any technical analysis tools, John Bollinger Bands have their positive and negative sides. Staying on the strengths of the tool. The main advantage of the latter is the ability to determine the trend as accurately as possible, which is one of the main criteria for successful trading in the market. This opens up opportunities for using the instrument in any market situation. With the help of the tool, in addition to determining the trend, there is a chance to predict areas and even pivot points of movement. To say more, focusing on the position of quotes in relation to the channel, you can objectively set goals. The universality possessed by the Bollinger band indicator allows it to be applied to all types of markets: foreign exchange markets, binary options market, stock market and stock market. The main thing is to adapt the settings for a specific time period and take into account the activity of each trading instrument individually.
Disadvantages of a technical analysis tool
There are certain drawbacks to such a technical analysis tool as Bollinger Bands. “Forex” analysis is very careful, which determines the relevance of acquaintance with the errors of the “envelope”. Due to the subjectivity of the bands, they can be interpreted in completely different ways by different traders. We draw attention to the lack of universal settings that could provide the supply of trading signals on different assets. Adaptation of the system is necessary for each of the trading formats. Most signals from the indicator turn out to be false. It is extremely important to filter them using additional technical analysis tools. According to the creator of the channel, he works poorly in weak and inactive markets.
Strips in options trading
Lines or “envelopes” are often used by traders when trading options. Oscillating and at the same time trend indicator reflects the actual deviation of the value of assets. The tool allows the trader to accurately determine whether the price of a trading instrument is high or low in comparison with average price indicators. This allows you to make a forecast regarding further growth or decline. A feature that a binary options trader should pay attention to is the constant tendency of the price to an average level.
Key signals for a binary options trader
The main signal of the indicator, which is worth a closer look at the binary options trader, is the maximum narrowing of the channel. This is a clear sign that in the near future it will be possible to observe a strong movement. If, after prolonged stagnation in the market, a bullish candle forms, which breaks through the channel, you can quickly consider buying. The likelihood that traffic will head north is 90%. If the situation is reversed, and a bearish candlestick has formed on the chart, which has broken through the lower border of the channel, it is better to give the advantage to sales. Any indicator signals should not be considered as the only true ones. Any formed pattern must be confirmed either by another indicator, or by the results of fundamental or technical analyzes.