In the last article on “How To Bollinger Band Indicator To Trade The Stock Market” we discussed on how to use the Bollinger Band to trade the Stock market, because it shows possible trade entries and exits for stocks.
In this article, we will look at how to use the same Bollinger Band indicator to trade the Forex Market.
I won’t go into any details about what Bollinger Band is or how it is being calculated or used, if you want to learn more about those, then you can read it in the previous article, I wrote about it HERE.
I will just dive into practical, on how you can use the Bollinger Band to trade forex, for the purpose of those, who would want to use this guide to practise, note that the settings for this Bollinger Band indicator (on the pictures below) are the default setting, that is, a period of 20 Simple Moving Average (SMA), deviation of 2.000, price calculation applied to the closing price.
The secret strategy here is to either buy or sell when the current market price crosses above or below the middle line (20 Simple Moving Average) in the Bollinger Band Indicator. Not to fall for fake and invalid strategy, I advise traders to always use trending pairs or commodity by looking at their past history and also by giving few pip movement from the middle line before placing your trade.
USOIL / West Texas Intermediate (WTI)
If we look at the US OIL chart, we will notice how trendy this commodity is and how accurate the Bollinger Band indicator is.
One thing you should take into consideration before using this indicator is, how trendy the pair, commodity or market is.
On the chart above, we can see two circles; one which is red and the other which is black. The red circles shows areas where there are false trade signal and the black circles shows valid trade signals.
If we observe the black circles well enough, we can see that the key in using this indicator is by waiting for price to cross either above or below the middle line which is the moving average (20 Simple Moving Average), if current market price crosses above the 20 SMA line, then that’s a signal to buy and if it crosses below, that’s a signal to sell. There is a catch you would need to use your Stop Loss and Take Profit, with a ratio of 1:3, if you don’t understand then see the next example.
On this pair, the United State Dollar and Japanese Yen, isn’t as trending as the oil commodity. If we are to use the same strategy I used on WTI, that is, to enter into either a sell or a buy when price move cross the 20 Simple Moving Average. Then we must certainly use Stop loss due to the high volatility in the price of this currency pair.
Using a Stop Loss and a Take Profit of ratio 1:3, means that our stop loss will be 1 and take profit will be 3. Let me explain, let’s assume you place a stop loss at 10 pips from the current market price using a ratio of 1:3 that means you will automatically set your take profit at 30 pips from the market price. This is a good practice as it allows your profit to always cover your loses. If you are using this method then it would need 3 consecutive losses to swallow a profit you make.
Let me give another example.
Remember when I said using the Bollinger Band indicator works best in trending market, the example I am about to show you is an example of what happen when you use this indicator in a sideways market.
We will use Euro and United State Dollar for this example, if you look at the picture above, we can see lot of red circle which denote fake signals. Though the market may look a bit like it wants to trend, there are always a whipsaw movement which will make this Bollinger Band Strategy to be ineffective. So I always advice traders to stay away from this kind of market while using the Bollinger Band indicators else your Stop Loss will always get hit before you make profit which will continuously be a loss for you.
If you like this article, please subscribe below and share with your friends and family.