If you are a beginner forex trader, then let me introduce you to this special characteristics of bollinger band indicator.
You will notice that the bollinger band indicator narrows and constricts as price volatility decreases-this may be due to price moving sideways in a narrow range.
This characteristic is called the “Bollinger band squeeze.”
When you see such happening, then the market may be due for a breakout to the upside or the downside.
Have a look at the chart below:
Can you see that before the candlestick that breaks out of the upper band, (refer to chart above) the upper and lower bands were being squeezed tight? And then after some time, finally a candlestick the price breaks the upper band?
And then what happens? Well, price continues to go up like the chart shown below:
That’s the beauty of the Bollinger band indicator :it tells you that the market is being squeezed into a tight trading range and you should expect a breakout.
THE RULES OF THE BOLLINGER BAND SQUEEZE FOREX TRADING STRATEGY
- As the Bollinger band squeezes, watch for a candlestick breakout of the either the upper or lower band.
- After that candlestick breaks out and closes either above or below the band, place a buy stop order 5 pips above the high of the breakout candlestick if it breaks out of the upper band.
- If a candlestick breakout a lower band, place a sell stop order 5 pips below the low of that candlestick only after it closes.
- Your stop loss should be placed 5 pips above the high (if you use sell stop order) or 5 pips below the low of the breakout candlestick if you use a buy stop order.
TAKE PROFIT OPTIONS
- place take profit target at 3 times what your risked
- or place your take profit target at a previous significant swing high or low point
- or you may trail stop and continue to lock in your profits as price continues to move favorably until you get stopped out in profit.
DISADVANTAGES OF THE BOLLINGER BAND FOREX TRADING STRATEGY
- As always, every forex trading strategy works when the market conditions are right but if not, it has its weakness and cannot be 100% successful.
- Sometimes, you will have the squeezed breakout happens only to reverse and get you stopped out.
ADVANTAGES OF THE BOLLINGER BAND SQUEEZE TRADING STRATEGY
- bollinger band squeeze indicates to you in advance that a price breakout may be imminent.
- so when the breakout happens, you have the opportunity to capitalize on that breakout.
- you can use this trading strategy in all timeframes
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