BUILDING SETUP - 4B (Best Bollinger Bands Brotherhood)
In the next several posts , I will try to explain my own personal point of view about Bollinger Bands, and we will build setup with BB. I call it 'setup' because I don't think this is complete strategy.
Complete Strategy consist of set up to entry and exit, risk and money management, recovery/contingency plan, etc.
While Complete Trading Plan, need personal trading style, psychological stat check list, working schedules, fundamental research, pre-trade technical analysis, complete strategies (several strategies depend on market conditions), evaluation/trading journal.
So, naming what I will discuss here as 'strategy' is away too much.. lol.
I know that many of you use Bollinger Bands as your line studies indicator and sometime without any question about the function and the setting at all.. lol
Why the default is 20 period ? and why default deviation is 2 ? could we put this default setting to our one minute chart ?
yes of course but could you explain what the relation between that 20 minutes range period of simple moving average in 1 minute chart ?
Base on what logical reason ? I bet no one could give me logical reason.. why that 20 minutes range period of BB in 1 minute chart could give you better perspective to support your decision making if compare to
25 minutes range period of BB in 1 minute chart..lol. or 10 minutes range period ?
So, again why 20 ? (would you like to ask John Bollinger for that ?).
Well ok then, it's for 20 days.. 20 damn trading days or 1 month average movement range.. base on EOD (End Of the Day) aka Close price.. lol.
and about that default deviation of 2 ? ask google or ask wiki don't be lazy so you know that standard deviation function.
Yup, that default BB setting is for daily chart, so apply that default setting to 1 minute chart will make you look ugly..
it's similar to that stochastic default of 5.3.3 that also for daily chart ( 1 week trading days compare to 3 days normal trend). or that default 14 days of RSI that came from stock market old dealing time era (long time ago..) that for 2 weeks Calendar day, etc, etc.
Now, make sense eh.. lol, so as technical analysts you should more logical in the way you use your tools.. ( side question; why they give you grid option in your chart setting of your MT4 or other charting package ? and what for ? keep the answer for yourself.. lol).
Ok back to our BB, if you want to create 'setup' in spot forex or in bins, that involve 2 Time Frames , smaller frame for the entry / exit detail, and bigger frame to look at general bias, then your tools selection and setting should also can adopt that 2 time frames range. that you want to analyze..
here is the example;
if I set my BB period to 24 and I put it to 5 minutes chart, meaning the 'averaging' range will be 2 hours (5 minutes x 24). and if I switching to 1 hour chart, then my 'averaging' range will be 1 day. So, with BB period 24 I could use 5 minutes chart for my detail entry/exit, and 1 hour chart for my general look up.
ok for this first standard BB, the setting will be period 24, deviation 2, and visualization only for M5 and H1 (set it in your visualization tab of your BB setting). and for better perspective of 'where I am' in smaller chart (M5), I add 2nd BB to that M5 with period 288, deviation 2 , this meaning 1 day 'average range' just exactly the same with the H1 BB. ( 12 M5/hour x 24 hours = 288 M5 period).
so, I set this 2nd BB to only visible in M5 chart.
This is what we look in M5 and H1 side by side
the picture maybe too small but if you could do it yourself in your MT4 then you know what I mean..
Next, about the function of Bollinger Bands.
They put standard bollinger bands in trend folder of your MT4 navigator window so basically this is for measuring and monitoring the trend (the middle band that actually Simple Moving Average), and because of their std deviation channel (upper and lower bands) then they could also use as volatility measurement (that 'squeeze' and 'expand' term).
And, the 'uncommon' part that just known by few, the 'leading' function.. as relative target Supply / Demand.. lol.
Here we go the example of upper / lower bands peak and trough as 'leading' next price movement target..
will be continue in my next posts..