Technicals | Aug 23 2012
By Richard Krivo, Trading Instructor, FXCM
The Bollinger Bands® will bracket price action. In times of high volatility, they widen, while in times of low volatility, they move closer together. So basically, they adjust to the movement and volatility of the market. This extra volatility filter is the real value of this tool.
There are two conditions we look for in a trading opportunity. We want to buy a pullback down to support when the market is in an uptrend or sell a rally up to resistance when the market is in a downtrend. The Bollinger Bands typically offer good resistance and support for our trade setup, so we just have to make sure we are following the strong trending pairs.
Let’s look at an example on this USDCHF daily chart.
The trend is up as we can see a series of higher highs and higher lows, which means to look for a dip down to support (the lower band) for a buying opportunity. I have two examples noted on the chart the first took place in May and the second took place in June of this year. The market traded down to the lower Bollinger Band in each of the instances noted in the boxes. However, this is not necessarily the buy itself but rather just the signal to begin to look for a buy on a reversal.
Traders will use a variety of methods to determine the entry, ranging from using their favorite indicator to just buying as the market moves up through the previous high. One popular approach is to buy on the first candle that closes above the middle line…the 20-day Simple Moving Average. This serves as more confirmation of the reversal and increases our chance of success on the trade. (On the chart above, the “buy candle” is identified by a green arrow.) Traders could then place their protective stop below the lowest wick in the box and look for twice that risk in profit for a 1:2 risk:reward ratio.
I would like to mention that price action on the USDCHF moved down and touched the lower Bollinger Band four times over the last several days. This means we should be on the lookout for another buying opportunity.
But rather than just buying right now, this would be the time to use your approach to pinpoint that buy entry to increase your chance of success on the trade. Price has moved up since the lower band was tested last week. By exercising patience and discipline and waiting for that first close above the 20-day Simple Moving Average would be a way to enter this trade using the Bollinger Band strategy that you just learned.
—Written by Richard Krivo
The views expressed are not FNArena's (see our disclaimer).
For real time news and analysis, please visit http://www.dailyfx.com/real_time_news
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
www.dailyfx.com
Disclaimer
Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.
FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
