In the forex market, there are two kinds of traders: those who predict market price movements using technical analysis vs. those who do it using fundamental analysis.
When it comes to determining the value of a currency, fundamental analysis looks at how political, economic, and social variables interact. It is possible for forex traders to make educated trading choices by first understanding the key drivers of a currency’s inherent value.
Historical price action is studied using technical indicators and other analytical tools to discover trends and predict the likelihood of future market moves.
In the long run, technical analysis will become more popular among currency traders. Traders often employ a combination of indicators to execute this approach, and Bollinger Bands® is one of them. Traders that are successful in the FX market also use a variety of indicators to increase the precision of their forecasts.
There are many trading systems that provide investors with a wide range of indicators. A good example of such a trading platform is MetaTrader 4, which is widely used by currency traders. By using a combination of indicators, traders may maximize the value of their technical research. Let’s start by talking about the Bollinger Bands indicator.
Bollinger Bands – How Does It Work?
Bollinger Bands are shown at a specific number of standard deviations apart from the moving average. Therefore it adapts to market circumstances based on standard deviation. The bands expand during times of increased market volatility and shrink during times of decreased market volatility. For these reasons, there are several strategies that use the Bollinger Bands indicator and make it easy to forecast future price changes and volatility in the marketplace.
Prices are typically shown with Bollinger Bands, but an indicator chart may also include them (Custom Indicators). The Bollinger Bands indicator has a changing width owing to market volatility, which makes it stand out. When prices fluctuate dramatically (i.e. when volatility is strong), the bands expand, giving prices more space to move. A price band contracts when prices are at a halt or when volatility is at a low.
Bollinger Bands are useful because they alert traders when volatility levels fluctuate. As with many currency pairings, the Bollinger Bands provide reasonably obvious indications for buying and selling when the range of an asset is usually stable. The Bollinger Bands may lead to stop-outs and painful losses, therefore traders take this into account while executing trades.
For this reason, investors who trade through MT4, not only use the Bollinger Band indicator, they also combine it with others. Those who are comparatively new in FX trading and use MT4, often search for the best MetaTrader 4 indicators explained, in order to, at first, get more about the indicators, to choose some of the best among others, and secondly, learn more about the indicators which work well when they are combined.
When it comes to Bollinger Bands, it should be said that Bollinger Bands respond and change form as price variations rise or decrease since they gauge departure from the average. More volatile markets almost usually mean new norms are being established, and traders may take advantage of this by utilizing Bollinger Bands.
Bollinger Bands provide one of the most dependable indications for forex trading, and this one is no exception. The Bollinger Bands indicator is included in MetaTrader 4 and it’s free to download.
Notifying you when the price breaks out or returns to the Bollinger Bands is helpful in many instances since it indicates that a trading opportunity exists. Trend tracking and trend reversal methods both profit from this warning. With this indicator, you’ll be notified by email or text message whenever a potential trade indication arises.
Indicators To Combine With Bollinger Bands
Bollinger Bands are often used in conjunction with another well-known indicator, the Relative Strength Index, or RSI, in order to validate the relative strength of a trend.
In technical analysis, the relative strength indicator (RSI) is a measure of the number of days in which security closes compared to how many days it shuts down over a certain period.
When these two indicators are combined, the RSI has the ability to either support or dispel potential price movements in real-time. A trader may conclude that a stock is overbought when the price of the stock hits the top band of the Bollinger Band price channel and the relative strength index (RSI) reads 70 or above at the same time. Afterwards, they may sell the shares, purchase a put option, or sell covered calls.
Let us instead assume that the price chart indicates that trade has reached the lower Bollinger Band and that the RSI is not below thirty. This indicates to the investor that the asset may not be oversold, despite the appearance of oversold Bollinger Bands in this instance.
The trader would not instantly place buy calls or acquire more shares since the downturn may persist for a period of time. If the relative strength index (RSI) is high enough, the trader may even contemplate selling.
