The moving average is perhaps the most popular forex indicator for determining the trend direction of a currency pair. However, whilst it can tell us if the market is falling or rising, it does not necessary give us the entry or exit signals. Trading when there is a moving average crossover can lead to lots of false signals. Hence, combing the moving average and Bollinger bands together can give us a more complete forex strategy so that we can time our entries in line with the trend and filter out some of the false signals.
What is the moving average?
The moving average is a trend trading indicator which can be used to identify if the market is moving up or down. If price is hovering around the moving average and it does not have any clear direction for a sustained period of time, this might suggest a range bound market.
You can set the MA periods to short, medium or long term, depending on your trading style. The default MA period is usually 14 whilst 35, 50, 100 and 200 are other prominent settings used by many traders. The shorter the MA period settings, the more susceptible the indicator is to swings in the price of a currency pair.
You can in theory use the moving average on any chart timeframe although I like to focus on the 1-hour charts and above as I find that it can help to filter out some of the noise from the shorter-term chart timeframes. It also means less time watching charts which is great. You can even do multiple timeframe analysis (MTF) to confirm the trend on all chart timeframes.
What are Bollinger bands?
Bollinger bands consist of a moving average line (middle) along with an upper and lower band that deviate from the middle line depending on current market volatility. Some traders use the Bollinger band breakout strategy where they look to enter long above the upper band or short below the lower band. Other traders might look for a Bollinger band reversal trade when price moves above or below the bands.
How to trade with Bollinger bands and moving averages?
As mentioned earlier, both the Bollinger bands and moving average indicators can give false signals when used alone. If we combine them both together along with price action analysis then we could increase trade probability. We will make sure that both indicators have signals that agree and time our entry accordingly.
When the price is above the moving average, we will look for a buy trade. When price is below the moving average then we will look for a sell trade. In terms of the Bollinger bands, we will look for price to breakout from the upper band for a sell signal or below the lower band for a buy signal. I always keep an eye on key support and resistance levels along with any prominent candlestick patterns for extra confirmation.
Buy signal
- Price is above 200 SMA
- Price is below upper Bollinger band
- Price is bouncing from support or breaching resistance
- Bullish price action
You can see in the EUR/USD daily chart below that we have all the criteria for a buy trade. Price is above the 200 SMA and below the lower Bollinger band. Support is holding up and the bulls are beating the bears as evident with the hanging man candlestick pattern. We could have used a stop loss of just 20 pips below the support level. This uptrend went on for around 1,450 pips which gave us a very favourable risk to reward ratio. The 200 SMA could have been used as a trailing stop but this may have left a few pips on the table from the high point this particular trend reached.
Sell signal
- Price is below 200 SMA
- Price is above upper Bollinger band
- Price is bouncing from resistance or breaching support
- Bearish price action
In the EUR/USD daily chart below, you can see that all of the conditions for a sell trade have been met. The price is below the 200 SMA suggesting a downtrend whilst we have a pullback above the upper Bollinger band. There is a strong resistance level that has been tested a few times and is holding up. The entry is confirmed with bearish candlestick patterns including a shooting star formation. The stop loss could have been placed just above the recent resistance level at around 30 pips where price fell over 2,300 pips during this downtrend which presented ample opportunity to take profits along the way. You will also see there were numerous sell signals on the way down for additional entries.
Bollinger bands and moving average strategy Pros & Cons
Pros
- Catch some big market trends
- Can time entry into a trend
- Can be used on any currency pair and timeframe
- Bollinger bands and moving averages are free to use
- Entries can be confirmed with other technical indicators
Cons
- Requires the user to time entry and exit
- Will be false signals
- Takes some practice
Bollinger bands vs moving average
To be honest, both of these indicators do a good job of filtering currency pairs so you can buy in uptrends and sell in downtrends. The moving average is no doubt the most popular indicator for doing this but it is not ideal for timing entry and exits. That is where the Bollinger bands comes in handy. It is a versatile indicator not just for spotting trend direction but also market volatility and possible entry/exit points into trades.
Conclusion: is the Bollinger bands and moving average strategy any good?
Yes, as you can see from the trade examples on this page, this forex strategy can catch some good trends. It is versatile and easy to understand. However, it does require the user to filter each buy and sell signal with additional chart analysis. Otherwise, there will be many more false signals. Not to mention, you will need excellent forex money management and trading discipline.
If you think the moving average and Bollinger bands strategy is something that you would like to try, you could always test it out on a demo account to see how things go. You can get a free forex demo account from most forex brokers, including IC Markets who have tight spreads and low fees for trading forex. I would always practice any forex strategy on demo at first in order to understand how it works and see if it produces good results before making any commitment.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
