How Forex Market Reacts to Bollinger Middle Band

The below analysis is related to our July 25, 2009 weekly report. We were used to choose a currency pair as the currency pair of the week and analyze it in details. On the below analysis, we focused on Bollinger Middle Band role in Forex market and the way that Forex market reacts to this simple moving average. We used the EUR-USD monthly chart as an example:

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(25 July ; 10:20 PM ; EST)

In comparison to last week, current monthly candle shows more tendency to go up but it is still below the Bollinger Middle Band. This candle still have 6 days to mature. If it closes above the Bollinger Middle Band, it will be a big signal for the next month and denotes that next month will be a bullish month. Of course, it is always possible that we see some bearish movements before the real bullish movement starts.

If it closes below the Bollinger Middle Band, new month candle will keep on testing the middle band and it is possible that it breaks above it or bulls give up and we see a sell signal below the Bollinger Middle Band. So July candle closing below the Bollinger Middle Band will make some indecision in EUR-USD market and will make the prediction and so trading, a little harder. We will see ranging in smaller time frames like daily.

Bollinger Middle Band is a tricky zone. Candlesticks try to break it and it is always hard to say how many candles will keep on testing the Bollinger Middle Band. And when it is broken, it can be retested by several candles.

Please look at the green ellipse on the below chart. It is a good example of Bollinger Middle Band breakout and retesting. In this case, candles didn’t spend a lot of time below the Bollinger Middle Band and the first candle that touched the Bollinger Middle Band, could break above it too. Then the next 6 candles moved right above the Bollinger Middle Band and finally the 7th candle went up. This is a monthly chart and 6 candles mean 6 months of indecision and ranging in the market. Of course market will be tradable in smaller time frames but we will not have any significant and distinguishable trade during this time. Trend traders suffer during this time because there is no trend for them to ride.

However, when you see the Bollinger Middle Band is broken and candles are closing above it (like the below example), you should know that market will move up because when market breaks above the Bollinger Middle Band, it will be too hard to break below it again. Of course everything is possible in forex jungle but in 80% of the cases, when candles break above the Bollinger Middle Band and then keep on closing above it, market will jump up.

It is the same with bear market. When candles break below the Bollinger Middle Band, they go up and retest it. If they keep closing below the Bollinger Middle Band, you should know that market will break down.

Weekly chart:

Weekly candles have been stuck between 1.3947 and 1.4144 levels for 8 weeks and finally, last week candle broke above the 1.4144 which can be considered as the 23.60% Fibonacci level too. 23.60% Fibonacci level looks a little higher than 1.4144 and last candle closed right below it, but as I have already motioned, Fibonacci levels are not levels. They are zones. And as weekly candles have been closing below 1.4144, so 1.4144 is the exact position of the Fibonacci level.

This Bullish movement showed the importance of weekly candle. The previous candle made a strong sell signal and the next candle followed it.

Last candle upper shadow indicates that there are some bearish pressure. It is possible that the next week candle moves around the broken level and closes as a Doji or keeps on going up toward the broken support line (magenta arrow). With considering the Bollinger Bands, MACD and RSI, there is no doubt that we have a good buy signal here. However, it is just a signal. What direction is the right direction, is something that market will tell us. Our job is locating the signals and taking the proper positions. In case market doesn’t move to our favorite direction, our stop loss will be there to save our capital.

Daily chart:

Daily chart also confirms the buy signal. As you see, the last week candles closed above the 1.4140 level, but there is another level at 1.4302, about 100 pips above the current price.

4hrs Candle:

A sell signal is formed on the 4hrs chart. It seems EUR-USD will go down for about 40 pips and then will make a buy signal above the support line to go up to test the 1.4302 level.

1hr Chart:

We will see the bullish movement we expect, after the resistance breakout on the 1hr chart.

Read more about Bollinger Bands:

• Combination of Support/Resistance Breakout, Bollinger Bands and Candlestick Signals
• How to Use Bollinger Bands in Forex and Stock Trading
• How Forex Market Reacts to Bollinger Middle Band
• How to Trade Using Doji Candlestick and Bollinger Bands

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• USD:
  ADP Non-Farm Employment Change 8:15am EST
  ISM Non-Manufacturing PMI 10:00am EST
  Crude Oil Inventories 10:30am EST
  FOMC Meeting Minutes 2:00pm EST
• GBP:
  Services PMI 4:30am EST
• AUD:
  Retail Sales m/m 7:30pm EST
  Trade Balance 7:30pm EST
• NZD
  Trade Balance 4:45pm EST

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EUR-USD: (06 January ; 05:15pm ; EST)

Daily Chart:

EUR-USD is still trying to break down the 161.80% Fibonacci level, but this levels has been working as a strong support line so far.

4hrs Chart:

You can see that we have a ranging market on 4hrs chart because of the indecision situation that the market has above the 161.80% level on the daily chart. MACD bars are also the indicator of the ranging market. It seems bulls are getting stronger slowly and there is more bullish pressure in the market now. However if they can not really take the control and break above the range, bears will take the control once again and EUR-USD will go down.

Further Reading: Before leaving our website, please take a look at the other articles we have published.

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