One of the best forex indicators is Bollinger Bands. They are very simple to use, they are free, and they are extremely reliable. At just a glance, you can tell if the market is trending or stuck in a range. You can tell if the market has hit extreme prices or if it is about to explode.
So I want to show you a simple trading strategy that relies heavily on Bollinger bands. And, oh yeah, it makes pretty good money!
Identifying a trending market with Bollinger bands is very simple. If the market is trending up, price will walk up the upper band. If the market is trending down, price will walk down the lower band.
Bollinger bands plot a moving average in the middle, and the extreme bands are formed by standard deviation lines around that moving average. Now don’t be scared by the algebraic term standard deviations. You don’t have to know how to calculate them – the indicator does that by itself.
Normally, the standard deviation for Bollinger bands is set at 2. For this strategy, you want to change it to 1. Just go into the settings of the Bollinger indicator and change the number 2 to 1. This will help you identify trading opportunities better.
Now that you have changed the standard deviation, you will notice that the extreme bands are now closer to the moving average. This is exactly what you want.
Now look for any candle that closes outside the bands. When you see this, enter a trade in the direction of the closing candle. Your stop loss will go on the other side of the candle.
So, in an uptrend, you will place your stop below the candle that closed above the upper band. In a downtrend, you will place your stop above the candle that closed below the lower band.
Your take profit should be twice as much as your stop loss. For example, if your stop loss is 25 pips, then your take profit would be 50 pips.
Pretty simple, right? Not hard at all, and that is the way most profitable trading strategies are – simple.