There are many ways of successfully trading the Forex markets. Some traders swing a trade where their anticipated holding time is from a day to a week plus. This requires having a wider stop and it usually has less than a 50% win rate. And because of the wider stop, the trader must trade very small lot sizes in order to protect their capital.
Some traders look for intraday trends that last 30 minutes to 3-5 hours. This can have a much higher win percentage, over 50%, and much tighter stops so a trader can trade more lots than with swing trading. There are many systems available that find 30-100+ pips per day.
This article is about Forex scalping techniques, specifically scalping Bollinger bands. Bollinger bands have become a popular technical analysis tool among scalpers that keep trades open for a relatively short time period. One of the reasons this tool is so useful is because of its ability to adapt to changing market volatility. So what exactly are Bollinger bands?
The simplified explanation is that the “bands” themselves are lines which run above and below a simple moving average of the prices. Bollinger bands are formed using standard deviation rather than fixed percentages.
The typical settings of Bollinger Bands use a setting of 20 periods (weeks, days, hours, etc.) and 2 standard deviations. The top band is formed by adding 2 standard deviations to the moving average and the bottom band is formed by subtracting 2 standard deviations from the moving average.
And how do Bollinger Bands help traders?
Bollinger Bands give traders a lucid way of visualizing the markets because the bands themselves dynamically expand when market volatility increases and contract when market volatility decreases.
Bollinger Bands Scalping Strategy
The most important concept in ANY form of trading is to keep losses small and have bigger winning trades than your losses on average.
But with scalping Bollinger bands, due to its higher winning percentage when done correctly, a trader can get away with winning trades that are the same size as losses. So if your stops are 10 pips, you can take 10 pip wins.
The markets, during the UK, Europe, and US sessions, move so much in most currencies that finding a 10 pip move in 10 – 60 minutes is often not too difficult.
Best Bollinger Band Settings for Scalping
Here’s a quick math lesson about standard deviation…
Standard deviation is simply a statistical measurement of the amount of data within normal bounds.
Is that confusing?
Well, here is the simplified version: The outer bands of Bollinger bands are standard deviations measurements. So when the price hits these bands, it means the price is at an unusual extreme. What would you think the market would do if it hit unusual extremes?
Probability tells you that the price should return back to normal eventually, so that means the price should turn around.
Simply put, when the price hits the outer bands of Bollinger bands, a scalper should look for the market to turn around.
Use Candlesticks, Stochastic, or Support/Resistance
So you know that the market should turn around, but how do you determine when it will turn around?
For that, you need another indication. And candlesticks, stochastic, or support and resistance are great options.
Look for an engulfing candlestick pattern where the market moves back toward the center of the Bollinger bands. Look for the stochastic to change direction and move back to the center. When using support and resistance — are the Bollinger bands right around major support and resistance levels? If so, you have a beautiful scalping opportunity!
Watch for Breakouts
Bollinger bands are awesome at showing volatility. You will definitely notice when the bands get really close together. This means that the market has grown quiet. The good news is that calm usually precedes the storm. This means that the market is prepping up to really start moving. When you see Bollinger bands really close together, it is time for scalping breakouts.
So, there you go with Bollinger bands and how they can help you read the markets.
How has your experience been reading Bollinger bands?
Let us know in the comments section below.