Bollinger bands is very good technical indicator, mainly used for forex trading. This indicator is developed by John Bollinger in 1980. He was famous american technical analyst. Bollinger bands set of two lines one is negative and one is positive. These lines run parallel with simple moving average line to determine the market upside and downside.
Pros of Bollinger Bands
- This indicator is very useful if you have already another indicator in place. It cannot be used as stand alone indicator or signature indicator.
- Bollinger bands shows range of market and prepare traders to take upside or downside risk.
- Most of the times market moves between bands hence capping risk.
- Traders can decide according to distance of bands to trade, Suppose Gold is at 1200$ and upper side band is 1220$ then traders may wait till market move up or down and band comes closer to market price.
- A very good indicator for measuring market range intraday. Its very useful to determine any stock or commodity range for intraday trading.
Cons of Bollinger Bands
- Many forex traders believe higher ceiling of band is stop loss in selling, If market is trading closer to upper line then its a sign of market overbought. I use RSI for to determine overbought. I dont use this indicator for overbought zone.
- It cannot be use as standalone technical indicator, You always need some other indicator to support your signal.
- Sometime ranges are too wide and it does not have any maximum or minimum cap on bands. Suppose gold is at 1200$ and upside line at 1220$ and you sell. IF market fires then upper line would move higher, leaving you frustrate with your position.
- It can deceive traders to take position according to two lines which is simply a estimate of market and not a stop loss.
Above is gold chart which have bollinger bands, you can see most of the times market has moved into the range but it does not show which side trade you should take.
It can be used to determine stop loss if you already have position but it can be dangerous as it keeps moving up and down according to market.
So my advice would be to use this great indicator with any stands alone indicator. I will add more technical analysis posts next week. Stay tune.
Happy Trading, Regards