Bollinger Bands and candlestick patterns

Bollinger bands are both a volatility indicator and a tool used by forex traders to generate trading signals. When the upper and the lower bands are close to each other, the volatility of the currency pair is low and so is the trading volume, and vice versa. Traders often trade Bollinger Bands with candlestick patterns, which is a technique combining Bollinger Bands and candlestick analysis. According to this methodology, a long position should be taken when a currency pair touches the lower Bollinger Band; after this happens, the position should be closed with a reversal candlestick pattern. On the contrary, a short position should be taken when the currency pair touches the upper Bollinger band and then forms a reversal candle.

This methodology is also useful to suggest trading signals. For example, as a general rule, a stop loss order should be placed beyond the reversal candlestick, although many traders prefer to close half of the trade when the pair hits the Bollinger Bands Simple Moving Average (SMA), because empirical evidence shows that candlestick patterns usually don’t lead to significant price reversals, but instead to shorter price moves. Traders can stay in the trade for the other half of the position to take advantage and any prolonged price move. And so in this case, if the price keeps trending in a precise direction, a trader can use the Bollinger Bands SMA breakout as an exit signal. However, if an earlier confirmation of another reversal pattern is confirmed, a trader should not wait for the SMA breakout, but close the trade immediately, instead.

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