Using Bollinger Band and Stochastic Along with Price Action

Using, Bollinger Band, Stochastic, Along, Price Action, Technical Analysis, fx trader, forex

Bollinger Band Indicator

Bollinger Bands were established by John Bollinger in the 1980s. Bollinger Bands are comprised of the following bands:

• The upper Bollinger Band

• The moving average Bollinger Band or Middle Bollinger Band

• The lower Bollinger Band


Using, Bollinger Band, Stochastic, Along, Price Action, Technical Analysis, fx trader, forex ChartBollinger Band Chart

The default settings for the Bollinger Band consist of a 20-period Simple Moving Average for the middle band and the bands are set at 2 standard deviations above and below the middle band. The purpose of Bollinger Bands is to give a relative meaning of highs and lows, measuring price volatility. The bandwidth increases when prices are volatile and narrows as the volatility decreases.

The Bollinger Band is useful for traders to help position themselves in the marketplace and under all market conditions. The advantage of the Bollinger Band is that it enables traders to detect price data between the lower and upper bands.

Stochastic Oscillator

Stochastic is an oscillator concocted by George Lane in the 1950s, which is comprised of two lines:

• The %K line

• And the %D line


Using, Bollinger Band, Stochastic, Along, Price Action, Technical Analysis, fx trader, forex ChartStochastic Chart

The default settings for the Stochastic oscillator are 14-periods. The %K line is usually displayed as a solid line, which is a 3-period Simple Moving Average of %K.  The %D line is usually displayed as a dotted line to act as a signal or trigger line. The Stochastic oscillates between vertical sizes of 0 to 100. While using the Stochastic, I prefer to use both, the %K and %D lines. The hypothesis behind this indicator is that it does not monitor volume instead it tracks speed or price momentum.

Therefore during an uptrend market, when the price is just close to its peak, the oscillator will be at its peak (above 80), indicating that the security is overbought. Conversely, when the price is close to its lows, then the oscillator has a tendency to move towards a low reading (below 20), which indicates the security is oversold.

The labels, however, can be somewhat rather confusing, as we cannot consider that overbought (above 80) will signal that prices will immediately drop, similarly with oversold (below 20) it should not be considered that prices will instantly turn to the upside. The terminology ‘overbought’ and ‘oversold’, is used to describe when prices are trading near the peak or trough of the period selected and in this case within the 14-day range. This situation can have a long-term effect.

Using the Indicators, Price Action and Timeframes

Most technicians will use Bollinger Bands or Stochastic as a basic method to settle on their trading decisions. I cannot consider it a fault, however, the root of the problem by applying a solitary indicator to settle on a trading decision is that it offers a different perspective from which to analyse the price action. The technical indicator consists of a number of data points that are calculated by setting a specific formula to the price data of a security. Any indicator or sign of what may happen later on is simply a probability, not a certainty.

The phrase that I like the most is: “Price Action is the best indicator as it is the study of the purest indicator and it is the one that will never tell a lie”. Price action is never misleading as it does not predict future price movements, but rather describes the past. Additionally, the price action reflects everything that is affecting a market at any given time and under all market conditions.

Therefore, with the help of technical analysis and some significant indicators, traders can shift the probabilities on their side, and here the price action could be turned into the most important indicator. Moreover, technical indicators are designed for short-term price movement analysis. Therefore, I use technical indicators to help identify high probability trade entry and exit points. To identify these entry and exit points, I always move towards lower timeframes.