This article is going to be very interesting because we will explain the most profitable and the easiest way to trade forex using Bollinger bands. The most interesting thing about this strategy is that we will use price action with Bollinger band indicator to make a high probability trading strategy that is the plus point of this article. As a forex trading strategy depends on the probability. A high probability setup will increase the winning ratio and we will increase the probability of trading strategy using the Bollinger bands indicator. Read this article to the end to learn the Bollinger bands plus price action strategy. We will start from the basics.

What are Bollinger Bands?

Bollinger band is a technical indicator that is used to identify volatility in price using moving average and standard deviation. Why does it make sense to me? Because of the built-in moving average and its natural structure. For example, let’s take an example of a simple spring. When we will apply force on the spring from one end then it will adopt a squeezed shape. When force will be released then spring will show its reaction. It will elongate and at the end, it will come to its original shape. Bollinger bands work the same as a spring. This is a natural behavior and Bollinger bands help us to identify the natural behavior of price.

Bollinger bands indicator consists of three bands

• Upper band
• Middle band
• Lower band

Bollinger Bands Explained

First, let me tell you what middle band is. The middle band is simply just a simple moving average of period 20. You can configure the moving average period but I will suggest you stick to 20 periods moving average. Simple 20 period MA means the average price of the last 20 candlesticks.

Standard deviation is the measure of the deviation of price from the mean value (moving average value). We will use 2 standard deviations in the Bollinger bands indicator because it’s mean more than 90 percent of price moves will occur within these two bands.

I hope you understood the basics of the Bollinger bands indicator.

Use Bollinger bands effectively

One more interesting fact about BB (short form of Bollinger bands) is that the simple moving average inside the Bollinger bands acts like a magnet. Price will always attract towards simple moving average inside the Bollinger bands. When price will deviate from the moving average then the moving average will start attracting the price. After a swing price will meet the moving average line. Keep this in mind this will let you make many critical decisions during trading later.

How to use Bollinger bands

This paragraph is to just show you the working of the BB indicator. In the end, we will add price action to this indicator as well as a simple strategy to trade with the trend. Trading with trends is the only way to survive in the forex market.

So let’s start. If the price is trading above the SMA and close to the upper band then it is a bullish signal. If the price is trading below the SMA and close to the lower band then it is a bearish signal. If price breaks through the simple moving average then it is a reversal signal. Every time price will touch the upper and lower bands then in the next move it will meet the moving average. If the price is continuously trading at upper and lower bands then it is a sign of a strong trend.

On the other hand, if the price is neither trading at the upper band nor at the lower band, then the price is in a ranging period, and the moving average line will be horizontal. THE horizontal SMA Line indicates that there is no trend in the price and the price is in a consolidation period. Keep these concepts in mind we will use them to trade.

How to trade Bollinger bands

The main topic of discussion is how to trade BB with price action. We have classified this topic into further two topics for better understanding.

• Trading BB during Trend
• Trading BB during Range

During Trend

The first step is to look for trends. Either trend is bearish or bullish. The bullish trend consists of consecutive higher highs and the bearish trend consists of consecutive lower lows.

The second step is to look for the price location. Either price is moving with a simple moving average or price is moving with the upper and lower bands.

Over bought and Over sold using Bollinger bands

The fact I forgot to discuss in the basics section is that the Bollinger bands indicator also shows the oversold and overbought conditions. No need for an RSI indicator.

• When the price is trading at the upper band then it is in the overbought condition in a swing.
• When the price is trading at the lower band then it is in the oversold condition in a swing.

The third step is to look for Fibonacci level. I will suggest you let the price meet the 61.8 Fibonacci level. This one is optional. It depends on your trading experience. If you are a beginner or intermediate in trading forex then you must use this tool. Expert traders can view the Fibonacci levels without using tools on a naked chart.

The fourth step is to look for a candlestick pattern either a pin bar or engulfing candlestick pattern. Pin bar and engulfing both are the same patterns just the difference is the timeframe. The pin bar is a strong price action signal. Candlestick pattern is confirmation for entry in a trade.

Bullish signal

You must meet all four steps to trigger an order. I will show you graphically an ideal setup for a bullish trade.

• Trend is bullish
• Price is oversold (price is trading at the lower band)
• Price is at 61.8 Fibonacci level
• A Bullish pin bar or bullish engulfing pattern

Look at the image below

The Stop-loss level will be below the 78 Fibonacci levels or 2 to 3 pips below the pin bar. Remember to include the spread. You should go with safe stop loss. Like if the price is below the 78 level then you should go with the pin bar otherwise go with the Fibonacci level.

Take profit level will be next higher high of the overall bullish trend. You can also use trailing stop loss after 1:2 RR but it depends on the situation. You can also extend profit using the middle line.

Bearish Signal

You must meet all four steps to trigger an order

• Trend is bearish
• Price is overbought (price is trading at the upper band)
• Price is at 61.8 Fibonacci level
• A Bearish pin bar or engulfing pattern at the upper band

The Stop-loss level will be above the 78 Fibonacci levels or 2 to 3 pips above the pin bar. Guys remember to include spread always.

Take profit level will be next lower low of the overall bearish trend. You can also use trailing stop loss after 1:2 RR but it depends on the situation.

During Range

First of all, let me tell you graphically about the valid or tradeable range.

Bullish signal

• Range is valid or not.
• Price is oversold (price is trading at the lower band)
• A bullish pin bar at the lower band

Bearish signal

• Range is valid or not.
• Price is overbought (price is trading at the upper band)
• A bearish pin bar at the upper band

I will not explain a lot about risk management here but this is another important topic. Just remember to invest 2% of your account balance per trade.

Go, demo trade this strategy for two months, and enjoy profits!