Market Overview

Sloping Bollinger Bands and Indicator Combinations


Sloping Bollinger Bands and Indicator Combinations


Once we have a firm understanding of how Bollinger Bands are used, the next thought that traders should be having is how to use this indicator to its optimal level.  To accomplish this, many traders choose to use Bollinger Bands along with other technical indicators to get a better sense of what is happening in a currency's price activity.   So, why would traders want to do this and what exactly are these traders looking for when these indicators are combined?


When traders combine indicators and look at them in relation to one another, traders are looking for evidence of agreement in the hope that all of the available signals point in the same direction.  If for example, you have two different indicators and both are suggesting upward price movement in the future, you will be able to trade with a higher level of probability than if you had been using only one indicator.


In addition to this, experienced traders use more than one indicator in combination as a way of knowing when not to trade.  This might seem confusing to some, and you might be asking: Why would a trader be looking for reasons not to trade?  Isn't it impossible to make money when you are not trading?  Well, of course, the fact is that traders cannot make any money when trades are not open.  But a great deal of trading is knowing when to stand aside, as this can keep you from losing money in the future.  If your multiple indicators are not showing agreement, it is generally a better idea to not open any trades because there is no way, in these cases, to turn the odds in your favor.  


So, since we can see that it is a prudent strategy to use multiple indicators at once, how can we decide which indicator to use?  The first way to approach this is to look at what has used for other traders and has been rigorously tested over time.  One of the most common choices is the Moving Average Convergence Divergence, or MACD.  “The proponents of the MACD indicator tend to believe it works well with other technical tools,” said Haris Constantinou, currency analyst at TeleTrade. “This is because combined indicators view price activity in slightly different ways and when agreement is seen between these two indicators, high probability trading set ups can be identified.”


Sloping Bands


Less commonly used signals can be generated when Bollinger Bands are showing a directional slope (either upward, downward or sideways).  This directional movement in the Bollinger Band indicator can be another signal to traders, indicating future trend direction or overall underlying momentum.  If prices are causing Bollinger Bands to slope upward, buy positions can be established in the currency on the expectation that prices will continue in this direction.  Conversely, when prices cause the Bollinger Bands to slope downward, sell positions can be taken in a currency in the expectation that prices will continue in the downward direction.  If prices are causing the Bollinger Bands to move sideways, no trade should be established because there is no indication of future price direction.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Technicals Markets Trading Ideas


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