Bollinger Band: Know The Basic Concepts and Its Influence On Forex
In the early 80s, John Bollinger discovered the concept of Bollinger Band which until now became a technical analysis that many traders use to analyze the market. Simply put, Bollinger Band consists of 3 pieces of the upper, middle, and bottom lines. The three lines are used to read price movements over a certain period of time.
Inside the Bollinger Band there is one middle line and 2 pieces of channel price line that is id middle and bottom. The price channel line will experience movement in accordance with price movements that occur in the market.
Overbought and Oversold
The price that occurs can I experience movement in a trend in which there is a price movement. In order to see trends better, some traders use moving averages as a volatility filter for price movements.
Through the way done above, the traders are able to get information related to the price movements that exist in the market such as rising and falling prices, and so forth. In order for you to see the price behavior better, then the price channel can be used which in this case is designed specifically to see price movement activity around the trend.
Inside the Bollinger Band concept the line at the top will describe the overbought area, while the oversold line is at the bottom. Lots of traders who use Bollinger Band combined with other technical analysis in order to provide a better picture than before.
When you use the Bollinger Band, the top and bottom lines are usually the target of price movements. So when the price moves away from the bottom line and over the moving average line with the period of 20, then the top line will usually be the next target of price movement.
When there is a rising up trend, then the price will usually move between the top line and the center line. While there is a downward trend, the price will usually move between the center line and the bottom line. As the price moves past the midline, it is usually identical to the price reversal signal.
Simple Strategies That Can Be Done
Most of the many traders who use Bollinger Band are combined with other technical analysis. However, just by using Bollinger Band, you can generate a simple strategy to make trading decisions.
The strategy you can do is make a position when the price breaks on the top or bottom line. Make a buy position after the price can break the bottom line, in this case the price has been considered to be in oversold condition.
In general terms usually when the bottom line has been able to be broken by the price because there is a big selling action, then the price can turn towards and away from the bottom line near the midline. The same is true in the opposite way, when the upper line is broken by the price and then make a sell position, then usually the price will reverse direction away from the top line and close to the midline.
The strategy that we mentioned above is very simple and you can use when using Bollinger Band to get the benefits gained.
The thing you need to consider when using this strategy is the need for a confirmation of a closing price that is beyond the top and bottom lines. When this confirmation does not exist, then we strongly encourage you to open a position.
Be Careful When Using Bollinger Bands
As you already know, that every strategy has a weakness that you need to pay attention to properly. So is the Bollinger Band that does not escape the weakness that you should pay attention to.
When the strategy does not go according to desire, the bottom and top lines are still continuously broken and the price will continue moving beyond the upper and lower Bollinger lines. The unfortunate thing is the price will not reverse quickly and then will impact on a significant loss in the existing position.
In the long run, usually a simple strategy is often true and most traders can not stand the price movement that occurs before the price reverses course.
What to do to be protected from Bollinger and?
You can place a stop loss order at a certain level. Another thing that needs to be done is the right time market has an important safe role in the Bollinger Band.
Important Rules That Must Be Well Understood
Bollinger Band will provide the relative definition of low and high and the relative definition you can use to compare price movements and the movement of indicators that will then result in trading decisions.
Important indicators you can get from sentiment, open – interest , inter – market data, and so forth.
Further volatility and trends have been taken into account in the formation of Bollinger Bands, thus their use in confirmation of price movements is not recommended.
You should also keep in mind that the indicators to be used for confirmation are not necessarily related to each other.
Next Bolllinger Band you can also use to see patterns such as Double Bottom and Double Top. The next rule is that prices can move outside the upper and lower Bollinger Band line.
Thus the explanation that we can convey is related to the basic concept of Bollinger Band that you can use as a simple strategy that is very useful for taking trading decisions.
Still confused by the above explanation?
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Hopefully what we have mentioned above about bollinger band can give more insight to you all who have read it.