Bollinger bands are one of the commonest indicators used to trade ranging markets. In ranging markets, as price moves along the upper line and the lower line of the bands, it tends to respect these levels by finding support and resistance.
The Bollinger bands contract on the reduction of volatility in the market and expand at the presence of high volatility in the market. When the market is successfully trending, you will clearly see the bands expand as a result of increased volatility in the market. If the market is ranging, the bands contract indicating consolidation due to fall in volatility.
Price movements between the bands is likely to bounce either on the upper line giving a sell signal or on the lower band giving a buy signal.
A candle stick pattern on the upper or lower band would be an added strength to the signal. The take profit levels are on the upper and lower band for sell and buy respectively.
Take a look at the USDCAD, Hourly chart below;
From the chart above, the sell and buy signals are confirmed by candlestick reversal patterns on the upper and lower bands. The take profit levels are on the upper and lower band for sell and buy respectively.
You can learn more on Bollinger bands trading here in our previous session!
Using lagging indicators like Bollinger bands in ranging markets does not always give clear signals. This is because they tend to flatten in the sideways direction. The indicators tend to give a lot of signals of which most of the signals can be fake outs.
These can work better when combined with other technical tools like support and resistance, Fibonacci retracements, channels, and trend lines which help in identifying the reversal points in the range. You can also combine them with oscillators such as stochastic and RSI that show the overbought and sold points.
Trading either in trending or ranging market environment profits. What matters is how you do it. As a forex trader you have to always come up with a strategy that will increase more odds to your side and use that to trade either of the situations.
Knowing if the current market is trending markets or ranging, will help you to determine the level of volatility at a current situation so that you are able to adjust your risk-reward ratio accordingly and come up with a good strategy to trade.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...