Learn Forex Trading Lesson 16 – Basic Bollinger Strategy

Filed under: Learn Forex Trading |

OK, I can feel you wanting to get your hands on something tangible, so in this tutorial we’ll introduce our first basic strategy for trading. Just before we do, there are a couple of terms and another indicator that need to be defined: Support, Resistance and Pivot Point.

Forex Support and Resistance

Support and Resistance

Two of the most commonly heard terms in forex trading are Support and Resistance, so let us take a short moment to  understand what we mean by these terms by referring to the ‘zigzag’ illustration on the right. As the diagram illustrates, the overall trend in the market in this example is rising (a bull market).   As the price moves up and then pulls back, the peak reached before it pulled back is termed resistance.   As the market resumes its upward path, the lowest point reached before it started going upward is termed support.

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A Pivot Point is another technical indicator derived by calculating the numerical average of a particular currency pair’s high, low and closing prices.   Similar to indicators described in previous tutorials, it is used identify, or predict, changes in the movement of the market.   For example, if the prices rise above the calculated pivot point then this might indicate a new support level.   Unsurprisingly, if prices fall below the calculated pivot point, then a new resistance level may be predictable.

Now on to our first forex trading strategy that you can potentially get to grips with and start trading with (although test it first with a demo account)

Strategy Objective

For our first forex strategy we are going to look at the Basic Bollinger System, which is used in range bound situations or periods of market consolidation.   These scenarios will be encountered in the days preceding a high impact news item that effects the market involved.

Indicators required to action strategy

To monitor your selected market using the Basic Bollinger Strategy you will need access to 1 hour and 4 hour technical charts. The charts will need to be configured to show Bollinger Bands and Stochastics Oscillators.   Auto pivot point calculator software to plot the pivot points, support and resistance levels is an option, but it is not completely necessary.

Buy Setup

When the candlestick closes and touches or cuts across the lower Bollinger band, and the Stochastics oscillators cross upwards < 25, place a BUY order at the open of the next candle. If the market is at a support level, the entry signal is strengthened. The Auto Pivot indicator will show the support lines.

Sell Setup

Go SHORT when the candlestick in view closes and touches or cuts the upper Bollinger band, and the Stochastics oscillators cross downwards at or above 75. Place a MARKET SELL order at the open of the next candle. The signal is strengthened if the market is presently at a resistance level.

Exit Strategy

For long entries, set your targets at the upper Bollinger or the next resistance level. You can also apply a trailing stop when the price action is about 10-15 pips above the middle Bollinger band. Stop loss levels can be set at 30 pips below entry point. For short orders, set the target at the lower Bollinger or the next support level. You can also apply a trailing stop at 10-15 pips below the middle Bollinger band. You can set your Stop Loss (SL) at 30 pips above entry point.

To help get to grips with some entry setups and exits, here are some examples below.

Example 1:

Forex Basic Bollinger Strategy

Entry: note that the trade is taken when the market is range bound (parallel Bollinger bands)

Example 2:

Forex Basic Bollinger Strategy

 

 Some precautionary notes here when executing the Basic Bollinger Strategy:

  1. The candles in view must touch or cut across the respective Bollinger bands.
  2. Allow the candles to close and enter at the open of the next candle.
  3. Use higher timeframes for greater accuracy.

Well, this has been an introduction to a first forex trading strategy that you can start to investigate and play with, and we stress PLAY WITH, in the first instance.   Open up a demo trading account and play with virtual money until the concept becomes crystal clear.

Enjoy your first venture as a forex trader!

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