How to read the market with Price Action and Bollinger Bands indicator

How to read the market with Price Action and Bollinger Bands indicator
How to read the market with Price Action and Bollinger Bands indicator

You think that the mastering Bollinger Bands must know how to combine it with price patterns or candlestick patterns to enter orders. The answer is no. To take it to the next level, let’s use Price Action in combination with the Bollinger Bands indicator to read the market and trade consistently.

Price action traders often overlook an important aspect of trading, which is price volatility, while simply using price action to measure price movements is difficult. However, there is a simpler way for you to quickly grasp the current market volatility. That is using volatility indicators like Bollinger Bands.

Reminder about Bollinger Bands indicator

Bollinger Bands is an indicator known to many new and old traders. It has the function of creating a band around the price zone. And the width of the band will depend on the current price volatility. Bollinger Bands shrink or expand depending on the average volatility of the price.

In other words, Bollinger Bands will help you read the current price volatility. The way price interacts with the upper or lower bands will give you valuable information about the direction of the market.

Bollinger Bands indicator

How to read the market with Price Action and Bollinger Bands

Here I will list 3 important cases where the price interacts with Bollinger Bands, including:

1. Candles with long tails attach to Bollinger Bands and reverse.
2. The price interacts with Bollinger Bands and gradually opens the band.
3. The candle is formed completely outside the Bollinger Bands.

Now let’s take a closer look at each case.

Case 1: Candles with long tails attach to Bollinger Bands and reverse

Sideways market. The price continued to move sideways for several days.

Bollinger bands indicator in the sideways market
Bollinger bands indicator in the sideways market

This type of market is ideal for reversal traders with short-term Fixed Time Trade orders or scalpers in Forex trading who like to enter and exit orders quickly, accepting low profits.

The trading method here is that traders will use limit orders (pending orders) when the price touches the upper or lower band of the Bollinger Bands.

If the price touches the upper band, a Sell Limit order will be placed. Otherwise, if the price touches the lower band, a buy limit order will be used.

You can increase the odds of winning these trades by waiting for the price to hit a support or resistance zone instead of using only the Bollinger Bands indicator to open orders.

Case 2: The price interacts with Bollinger Bands and gradually opens the band

This is when the price continues to push the band, which is a sign of a strong trending market.

The price clings to the band and gradually expands the band
The price clings to the band and gradually expands the band

To use price action in this case, the most common way is to use buy/sell stop when the price closes above/below Bollinger Bands for Forex trades. As for Fixed Time Trade, we can wait for the price to rise sharply and then return to the support zone to open a bullish order. Otherwise, when the price drops sharply and bounces back to the resistance zone, enter a bearish order.

However, you need to determine in advance whether the market has exited the sideways environment? Has the market broken out successfully or just broke out?.

Why do we ask these questions? Because price action traders only use Bollinger Bands as a support factor, not a determining factor. There are many cases where the price breaks out of the sideway zone or the resistance/support zone, it then forms a false breakout to trap all traders who like to trade breakouts. Therefore, you need to be careful when observing the price being in this case.

Case 3: The candle is formed completely outside the Bollinger Bands.

This case is opposite to case 2 but it is easy to confuse. You need to pay close attention to Bollinger Bands designed to cover the price in normal conditions. That means when the price closes outside Bollinger Bands, there will be 2 cases.

1. The price has formed a strong trend
2. The price has gone too far (oversold or overbought).

The candle closes outside the band range of the Bollinger Bands indicator
The candle closes outside the band range of the Bollinger Bands indicator

It is not easy to distinguish this case from case 2 if you just use Bollinger Bands and see the overall way the candles close outside the band. For me, to determine this case, it is necessary to pay close attention to the formation process of the candles outside Bollinger Bands.

Is it forming Pin bar, Spinning Top candles? Is it hindered by any resistance/support levels nearby? And finally, does the price suddenly bounce off the Bollinger Bands?

To accurately predict when the price will reverse, you can combine it with the RSI indicator. Because in the overbought or oversold zones, the price has a high probability of reversal. So it is easier to judge based on that. Usually, this condition is more suitable for a reversal trade. Thus, we will have the following trading method.

If the candle closes from 70 – 100% outside the lower band + the oversold zone, open a bullish order.

If the candle closes from 70 – 100% outside the upper band + overbought zone, open a bearish order.

Summary

Although the Bollinger Bands indicator is easy to use, it is not simple to build a strategy to make money with it. So you need to try combining it with many other indicators to create the most effective strategy. And price action can also be seen as an indicator to assist in analyzing the upcoming trend. Hope the article will be helpful for you. Wish you success.

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How to read the market with Price Action and Bollinger Bands indicator
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