Bollinger bands and Investing with Cash Trap

16. What are Bollinger bands?

The Bollinger bands are part of a technical analysis tool that was developed by John Bollinger. The Bollinger bands are 2 standard deviations away from the simple moving average (SMA). Around 90% of the time the forex pair prices are within the Bollinger bands.

In the image above, U indicates the upper Bollinger bands and L indicates the lower Bollinger bands. 10% of the time  the prices are beyond the Bollinger bands.

(You’re probably wondering — EMA stands for exponential moving average.)

4 Bollinger band strategies

When you use CashTrap, you can use 4 different strategies using Bollinger bands:

  1. Inside band trading,
  2. Pull back to middle,
  3. Surfing &
  4. Reversals.

Inside band trading

Bollinger bandsIn this image, the blue (call) candle is beyond the upper Bollinger band. That means that the market has overbought this currency pair and you should probably make a put (sell) trade as soon as possible.

In many cases (but not this one), the red candle could easily go down all the way down to the SMA. You could use the SMA as a support.

Bollinger bandsIn this image the red (put) candle is beyond the lower band. The market has oversold the currency pair and you should probably make a call (buy) trade. (You may even want to use the SMA as a resistance line if your CashTrap point system gives you enough points.)

Assuming these are 5 minute candles and 3 minute trades, the person making the trade might be wise to rollover during that second red candle.

Pull back to middle

Bollinger bandsAfter there is a long buying or selling trend, you should investigate the possibility that the price could pull back to the middle (SMA). In this example, it pulled back way beyond the SMA.

Surfing

Bollinger bands

In this example blue candles have been surfing along the upper Bollinger bands for a long time (7 candles). The last 2 blue candles went above the upper bands meaning that this pair has been overbought. That would indicate you should expect investors to start selling. As soon as I would have seen that first red candle forming, I probably would have made a put (sell) trade.

Reversals

As I said before, the price of the currency pair is between the bands 90% of the time. So, if a candle breaks out beyond a band, expect it to reverse and head towards the SMA.

So, if a candle breaks out through a lower band, assume that the pair has been oversold and it is time to start buying. As soon as CashTrap shows a green (call) arrow, check the other indicators to see if it is time for you to call.

If a candle breaks out through an upper band, assume that the pair has been overbought and it is time to start selling. As soon as CashTrap shows a red (put) arrow, check the other indicators to see if it is time for you to put.

Think of Bollinger bands as being like a rubber band. They always want to make a candle snap back towards the SMA.

Combining Bollinger bands with CashTrap

When using CashTrap, consider the trading principles from the CashTrap post. Then you look at 7 or so different indicators. Each indicator is worth one point. The total of the points for a particular currency pair determines what percentage of your brokerage account you should invest. Use the guidelines below:

5 points — 1%
6 points — 2%
7 or more points — 3%.

The CashTrap 7 point system

  1. Currency Strength Meter. (In this example from the Alert Panel, the numbers 26  & 71 are to the right of the names of the currency. If the first number is larger, it’s telling you to call. If the second number is larger, it is telling you to put.)
  2. Red or green arrow. (If it’s green, the first number in the Alert Panel must be higher and the word there must be Call. If it’s red, the second number in the Alert Panel must be higher and the word there must be Put.)
  3. Price at top or bottom Bollinger band
  4. Price between Resistance (red) or Support (green) lines
  5. “S” or “B” on Stochastic meter
  6. Stochastic Indicator over dotted line & crossing over again
  7. RSI Indicator over dotted line & crossing over again

Interest fact about Bollinger bands

When Bollinger bands are parallel, either a put arrow or a call arrow may be able to give you a point.

Otherwise, you have to go along with what the Currency Strength Meter suggests. If the first currency is higher, it must be a call arrow. Otherwise it must be a put arrow.

Learning more

You are a student with IM Academy. If there is anything in the above points that you do not understand, try watching all of the Matty Thayer’s favourite videos in GoLive again.

To learn about every feature in the VideForex trading platform, start with the Video called Start Here.

 

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