Bollinger Bands Indicator is also used to identify periods when a currency price is overextended. The guidelines below are considered when applying this indicator to a sideways trend.
It is very important because it is used to give indications that a break out may be upcoming. During a trending market these techniques do not hold, this only holds as long as Bollinger Bands are pointing sideways.
- If price touches the upper band it can be considered overextended on the upside- overbought.
- If price touches the lower band the currency can be considered overextended on the bottom side- oversold.
One of the uses of Bollinger Bands is to use the above overbought and oversold guidelines to establish price targets during a ranging market.
- If price has bounced off the lower band and crossed the center-line moving average then the upper band can be used a sell price level.
- If price bounces down off the upper band and crosses below the center moving average the lower band can be used as a buy price level.
In the above ranging market the instances when the price level hits the upper or lower bands can be used as profit targets for long/short positions.
Trades can be opened when price hits the upper resistance level or lower support level. A stop loss should be placed a few pips above or below depending on the trade opened, just in case price action breaks out of the range.
