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烛台Bollinger Bands

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Trading with Bollinger Band® Reversal Patterns

The Bollinger Band® reversal pattern occurs frequently across all financial markets. When employed in a strategy, Bollinger Band® reversal signals can provide traders with encouraging risk-reward ratios , and both experienced and novice traders alike can reap the benefits.

This article will cover the basics of the Bollinger Band® reversal strategy:

  • What are Bollinger Band® reversal patterns?
  • How to identify a Bollinger Band® reversal pattern
  • Top tips and strategies

This article assumes the reader has a basic understanding of Bollinger Bands®. If you’d like a refresher, read our guide to Bollinger Bands® in forex trading .

What are Bollinger Band® Reversal Patterns?

Bollinger Band® reversal patterns occur while using the 烛台Bollinger Bands Bollinger Band® indicator. These reversal signals can appear in all financial markets and are associated with both bullish and bearish reversals.

Identifying the reversal is simple and relates closely with the double bottom and double top candlestick patterns (also referred to as ‘W’s’ and ‘M’s’).

Bollinger Band reversal

How to identify a Bollinger Band® Reversal pattern

A step-by-step guide to identifying the Bollinger Band® Reversal pattern on a chart:

  1. Add a Bollinger Band® indicator (20 period, 2 standard deviation) to the chart - usually daily or hourly using price action or technical indicators
  2. Isolate a double top/bottom, depending on the preceding 烛台Bollinger Bands trend
  3. Look for the first top/bottom breaking through the respective Bollinger Band®
  4. Wait for the second top/bottom to appear which DOES NOT break the Bollinger Band®
  5. Look to enter from this point or take the traditional entry point using the double top/bottom method of using the neckline as the reference point

Bollinger Band® Reversal Trading Strategies

Below is an example of Bollinger Band® reversal on a forex pair. The steps above are shown clearly to illustrate the simplicity of this trading technique.

NZD/USD Daily chart bearish reversal

The chart below shows the Bollinger Band® reversal on an NZD/USD chart. The trend has been identified as an uptrend using simple price action movement of higher highs and higher lows.

The first peak of the double top (‘M’) is seen breaking through the upper Bollinger Band® (highlighted in yellow), after which the second peak is seen falling short of the upper Bollinger Band®. This shows a lack of momentum to the upside by bulls.

Bollinger Band double top reversal

Some traders enter into a short position from this point however, using the neckline (dashed line) of the double top is commonplace. Simply put, a break in the neckline will trigger the short entry.

This can be done by a pure break or a candle close below the neckline. This is completely at the trader’s discretion. Stops are generally taken from recent swing highs in this example, while limits (take profit) levels can be determined by price action or Fibonacci levels.

Further reading on Bollinger Bands®

• Go back to basics with our guide to trade forex with Bollinger Bands®

• Are you a keen day trader? Learn how to use Bollinger Bands® in day trading

• Another popular 烛台Bollinger Bands strategy among traders is the Bollinger Bands® and MACD approach

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

How to Use Bollinger Bands® in Forex Trading

Bollinger Bands® are utilised by technical traders in all financial markets including forex. This article will introduce Bollinger Bands® and how they assist traders in technical analysis. It will also provide an overview of top strategies and tips for trading forex with Bollinger Bands® - including trading 烛台Bollinger Bands the trend and the Bollinger squeeze.

What are Bollinger Bands® and how to do they work?

Bollinger Bands® are a versatile technical analysis indicator widely used among traders. John Bollinger first developed this indicator as a solution to find relative highs and lows in dynamic markets. The indicator itself 烛台Bollinger Bands is comprised of an upper band, lower band and moving average line.

The two trading bands are placed two standard deviations above and below the moving average (usually 20 periods). Using two standard deviations estimates that 95% of price data will be contained within the two bands.

bollinger band plotted around a 20-day moving average

As a rule of thumb, prices are deemed overbought on the upside when they touch the upper band and oversold on the downside when the reach the lower band.

As price oscillates between the indicators upper and lower extremes Bollinger Bands® become an excellent tool to gauge volatility . When bands contract there is less volatility in the market, which is a great indication to use a range bound strategy . Likewise, Bollinger Bands® will expand as the market becomes more volatile. At these times traders may employ a breakout or a trend-based strategy .

How to trade Forex with Bollinger Bands®

There are 烛台Bollinger Bands several different techniques involved in using Bollinger Bands® to trade the forex markets. The most popular are:

1) Using market trends : Traders can identify entry signals using the bands as a measure of support and resistance .

2) Bollinger Squeeze: Applying the volatility indications of the bands

1) Trading the trend

trading the trend with the Bollinger Band

The chart above shows the EUR/USD chart in an uptrend – depicted by higher highs and higher lows. Using the Bollinger Band® indicator, the lower band is seen as a gauge of support. When price touches the lower band, traders use this as a signal to enter a long (buy) trade. This strategy works for both uptrends and downtrends. Take profit (limit) levels are generally taken from the upper and lower bands depending on trend. In this example, the upper band will be 烛台Bollinger Bands used as the take profit level.

In summary, trading the trend with Bollinger Bands® is relatively simple:

  • Identify the trend
  • Use upper and lower bands in conjunction with price movement to identify entry points
  • Use respective upper and lower band as target levels

2) Trading the Bollinger Band® Squeeze

EUR/USD 烛台Bollinger Bands weekly chart:

Bollinger Band squeeze

As mentioned previously, when the bands contract volatility is low and vice versa. The Bollinger squeeze looks for breakouts above/below the band depending on trend to be used as entry signs.

Highlighted in green shows these breakouts in an uptrend. Traders will look to enter at the indicated green circles. After each entry, it can be seen that the candles are ‘walking the 烛台Bollinger Bands Bollinger‘ (following the upper band). After the breakout candle the bands expand implying greater volatility in the market.

The black shaded circles illustrate the point at which traders will look to take profit before looking for further breakout signals.

Trading with Bollinger Band® Reversal Patterns

The Bollinger Band® reversal pattern occurs frequently across all financial markets. When employed in a strategy, Bollinger Band® reversal signals can provide traders with encouraging risk-reward ratios , and both experienced and novice traders alike can reap the benefits.

This article will cover the basics of the Bollinger Band® reversal strategy:

  • What are Bollinger Band® reversal patterns?
  • How to identify a Bollinger Band® reversal pattern
  • Top tips and strategies

This article assumes the reader has a basic understanding of Bollinger Bands®. If you’d like a refresher, read our guide to Bollinger Bands® in forex trading .

What are Bollinger Band® Reversal Patterns?

Bollinger Band® reversal patterns occur while using the Bollinger Band® indicator. These reversal signals can appear in all financial markets and are associated with both bullish and bearish reversals.

Identifying the reversal is simple and 烛台Bollinger Bands relates closely with the double bottom and double top candlestick patterns (also referred to as ‘W’s’ and ‘M’s’).

Bollinger Band reversal

How to identify a Bollinger Band® Reversal pattern

A step-by-step guide to identifying the Bollinger Band® Reversal pattern on a chart:

  1. Add a Bollinger Band® indicator (20 period, 2 standard deviation) to the chart - usually daily or hourly using price action or technical indicators
  2. Isolate a 烛台Bollinger Bands double top/bottom, depending on the preceding trend
  3. Look for the first top/bottom breaking through the respective Bollinger Band®
  4. Wait for the second top/bottom to appear which DOES NOT break the Bollinger Band®
  5. Look to enter from this point or take the traditional entry point using the double top/bottom method of using the neckline as the reference point

Bollinger Band® Reversal Trading Strategies

Below is an example of Bollinger Band® reversal on a forex pair. The steps above are shown clearly to illustrate the simplicity of this trading technique.

NZD/USD Daily chart bearish reversal

The chart below shows the Bollinger Band® reversal on an NZD/USD chart. The trend has been identified as an uptrend using simple price action movement of higher highs and higher lows.

The first peak of the double top (‘M’) is seen breaking through the upper Bollinger Band® (highlighted in yellow), after which the second peak is seen falling short of the upper Bollinger Band®. This shows a lack of momentum to the upside by bulls.

Bollinger Band double top reversal

Some traders enter into a short position from this point however, using the neckline (烛台Bollinger Bands dashed line) of the double top is commonplace. Simply put, a break in the neckline will 烛台Bollinger Bands 烛台Bollinger Bands trigger the short entry.

This can be done by a pure break or a candle close below the neckline. This is completely at the trader’s discretion. Stops are generally taken from recent swing 烛台Bollinger Bands highs in this example, while limits (take profit) levels can be determined by price action or Fibonacci levels.

Further reading on Bollinger Bands®

• Go back to basics with our guide to trade forex with Bollinger Bands®

• Are you a keen day trader? Learn how to use Bollinger Bands® in day trading

• Another popular strategy among traders is the Bollinger Bands® and MACD approach

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.