As seen in the above candle stick forex chart for the currency pair EUR/USD in Fig 1, the Bollinger Bands are three blue dotted lines which seem like flow of a stream.
It seems that when the price of the currency pair (in this case EUR/USD) goes down and touches the lower band, it goes up and when it goes up and touch the upper band then it goes down. Well, this is how the Bollinger Bands are used to predict when to enter and when to exit i.e. when to buy and when to sell or short sell. But please note that this buying selling forex trading signals are only good when the prices of the currency pair is moving in range (sideways) and without up or down trend.
When and how to use Bollinger Bands in Forex Trading/Currency Trading:
Bollinger Bands are good when market in range (neither bullish nor bearish) but not when its trending market (uptrend i.e. bullish or downtrend i.e. bearish)
Why? Well, if we see the Forex chart in Fig 2 below, it is clear as to what would have happened if entry/exits were made during range (points A,B,C,D) and what if entry/exits were made during the trend (point X,Y)
Bollinger Bands during the Range (sideways) movement:
1) If we short sold the currency pair (EUR/USD in this case) at A (when price touched Upper band) then we could have made profits by covering the trade when the price touched the lower Band at B.
2) If we had bought EUR/USD at B (when price touched Lower Band) then we could have made profits by covering the trade when the price touched the Upper Band at C.
------ and so on….
Bollinger Bands during the Trend:
If we short sold EUR/USD at X (when price touched Upper band) and waited for it to touch the lower Band to take profits, we would be in loss as it never went down to touch the lower band. Same with point Y and so on.
How to use Bollinger Bands in Forex Trading (currency Trading):
Conservative but high probability results:
1) When the price of the currency pair is moving in range (sideways movement): Buy when the price touches the lower band or goes outside of the bottom band. Sell at the moving average i.e. middle band
2) When the price of the currency pair is moving in range (sideways movement): Short sell when the price touches the upper band or goes outside of the upper band. Sell at the moving average i.e. middle band
Aggressive Trading Approach while using Bollinger Bands:
1) When the currency pair is moving in range (sideways movement): Buy when the price touches the lower band or goes outside of the bottom band. Sell when price touches the opposing band i.e. upper band.
2) When the currency pair is moving in range (sideways movement): Short sell when the price touches the upper band or goes outside of the upper band. Sell when price touches the opposing band i.e. lower band.
Period setting for technical analysis indicators in Forex Trading:
in Forex trading the quite preferred setting for the BOLLINGER BANDS indicator is 14 periods, which means if we were to calculate BOLLINGER BANDS on a daily chart we would measure 14 days, and in the case of an hourly chart, we would measure 14 hours. The default setting of 14 is common to several popular indicators, such as Relative Strength Index (RSI) and Average True Range (ATR).
We explained Bollinger Bands in the context of Forex Trading but the same stands good for stock trading or any commodity trading.
