Beginners

How to increase profits using Bollinger Bands

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One of the most useful indicators is the Bollinger Bands. The Bollinger Bands are composed of a moving average and an upper and lower standard deviations. The Bollinger Bands are computed as follow:

First is the moving average. Many systems are set to a 20-period simple moving average by default.

Second is the standard deviation which measures the volatility of the currency prices.

Third and Fourth are the upper and the lower bands. These bands are usually set at 2 standard deviations over the moving average. This 2 standard deviation setup is based on 20-periods of closing data.
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The Bollinger Bands will contain the measurement of approximately 85% of the movement of the currency pair. If you set the standard deviations with a higher value, the resulting percentage will be higher and more of the price data will be included inside of the bands. Obviously, the smaller the number will include a lesser value within the bands.

Although there are several ways in which the bands can be used, the two most commonly used strategies are mean reversion and the breakout.

For the mean reversion strategy you already know that the price of the currency will stay within the bands 85% of the time when you use a 2 standard deviation. This strategy calls for you to sell when the price hits the upper band and to buy when the price hits the lower band.
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As the name suggests, for the Breakout strategy you wait until the price of the currency pair breaks through the bands. This would indicate that there may be a significant break in the direction of the trend. This is especially true when the volume and the price of the currency pair has been and there’s a sudden break. A simpler way to trade the breakout strategy is to buy or sell when the currency pair break above or below the band respectively and exit the trade when it closes below or above the 20 simple moving average.

There are many ways of using the Bollinger Bands and several variations of the two strategies discussed above. For example you can set a spread strategy using the mean reversion and make small profits as the currency moves within the bands. Whatever strategy you decide to use, whether it is the mean reversion or the breakout strategy, make sure that you know well how to execute it and start making successful trades with it.
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Categories: Beginners, Intermediate