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Bollinger Bands are one of the key indicators Forex traders use to guide their success in the market. Developed by John Bollinger in the 1980’s, Bollinger Bands consist of two moving bands. These bands show the two standard deviations above and below the market’s moving average.
Since John Bollinger’s time, several Bollinger Bands indicators have come along. Traders use these indicators to discover inversion patterns, trends, and price breakouts. In this article, we investigate three of those indicators.
How Traders Use Bollinger Bands Indicators
Bollinger Bands trading strategies help price action Forex traders study the market. Then traders can more clearly see when the breakout price for a particular stock is likely to occur. (The breakout price is the point at which the two bands in the Bollinger Band indicator cross each other.) This helps them more precisely characterize their best Forex trading range, as well as any possible instability in the market.
Best Bollinger Bands Indicators
Among the most widely used of the Bollinger Bands indicators are:
- Bollinger Band Trend Indicator, or BBTrend Indicator
- Bollinger Bandwidth Indicator
- %b Indicator
Scroll down for more information about how to use each one.
Using the BBTrend Indicator
BBTrend is a fairly new Forex price action indicator. Originally called the Bollinger Bands Trend Price Action Forex Trading Indicator when it came out in 2012, it is one of just a couple of Bollinger Bands indicators that can flag both direction and strength. This makes it a truly beneficial technical tool for price action Forex traders, as they can use this indicator to analyze the codes that appear in the graph.
For example, if a trader notices that the lower of Bollinger Bands rises above zero, they understand that to be a signal of a bullish market. On the other hand, if that band stays below zero, that is a sign of a bearish market trend.
The amount at which the band is below or above the zero can tell a trader much about the quality or energy of the trends. Therefore, this indicator has become a valuable asset for Forex trading technical analysts. Also, it offers an option to the directional development list, or ADX, an indicator that gives comparative readings.
Using the Bollinger Bandwidth Indicator
Many traders consider the Bollinger Bandwidth Indicator to be the best indicator to use with the Bollinger Bands. This is because this indicator clearly shows the precise width between the upper and lower bands in comparison with the moving average.
For this reason, many traders use this indicator in conjunction with the Bollinger Bands Squeeze. The “squeeze” shows the degree to which the lower band and upper band are pressing against the simple moving average.
To determine the squeeze, traders look at all three bands over a certain period of them. Then they use a formula to determine a number for the squeeze. This number can tell them a great deal about the movement of the stock they’re observing as well as the market in general.
Many Forex price action traders use this method to predict instability in the markets. Also, many traders turn to predictions about price movements from NSBroker. They also use leveraging techniques such as statistical analysis and behavioral economics to round out their understanding of the market.
Using the %b Indicator
Another indicator traders often use with the Bollinger Bands is %b. This indicator plots the end price of the stock as a level of the upper and lower Bollinger Bands. Here is the formula for that calculation:
- Assign the upper band a value of 1.0
- Then give the middle band a value of 0.5
- Assume a value for the lower band of 0
Using this formula, %b shows the distance between the bands, based on a particular stock’s current price. For instance, if the upper band sits at $30 and the present cost is $22.50, %b has a value of 0.75. This puts the stock three-fourths of the way toward the upper band limit.
Such calculations can help you to determine when a value is about to hop a band. This can help you to determine divergences and pattern changes.
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By using the technical indicators we discuss here, you can improve your trading skills and enjoy more success in the Forex market.