Bollinger Bands Squeeze is a very important signal… very important.
It is like the lull before the storm. It means there is always a strong movement after a Bollinger Bands Squeeze. The size of the strong movement can vary from tens to hundreds or even thousands of pips. This is what we can never know when we locate a Bollinger Bands Squeeze. But we can always say that a strong movement that can make some profit is on the way when a Bollinger Bands Squeeze forms on the chart.
Forex traders have to enter the markets after the price breaks out of a Bollinger Bands Squeeze. As long as the price is still moving sideways inside the squeeze, you can’t say what will happen. But once the price breaks out of the squeeze, you can get in the market.
Sometimes, Bollinger Bands Squeeze is continued and long, but in most cases it is short, like the example I will show you you below.
Fortunately, other Forex indicators can help a lot to identify and confirm the validity and strength of a Bollinger Bands Squeeze breakout.
I have recently talked about the most popular and reliable Forex indicators here. I am going to show you how these indicators help to confirm a Bollinger Bands Squeeze breakout.
Please follow me on the chart below. It is the EUR/JPY weekly chart.
The two parallel red lines show a sideways market that finally results in forming a Bollinger Bands Squeeze pattern that is marked in the below chart by two red arrows. When Bollinger upper and lower bands converge like that, it means the party that had the control has become exhausted. Therefore, it is possible that the other party takes the control and makes the price turn around. It is also possible that the same party takes the control again and moves the price to the same direction more. This is what we never know before a strong and valid Bollinger Bands Squeeze forms. It is where the indicators like Stochastic Oscillator, RSI and MACD can help a lot.
1. Stochastic Oscillator
As you see in the chart below, Stochastic Oscillator doesn’t show anything when price is still moving inside the range between the two red lines. This is where you have to ignore Stochastic Oscillator. This indicator doesn’t help when it is moving between the 20 and 80 levels. This is what I always emphasize. If you try to use this indicator when it is moving between the 20 and 80 levels, you will lose.
However, finally 2016.11.13 weekly candlestick closes above the upper red line, and so it breaks above the Bollinger Bands Squeeze. When this candlestick closed and the next one opened, Stochastic Oscillator broke above 80 level and stayed in the overbought area. This is the time that Stochastic Oscillator confirms the Bollinger Bands Squeeze breakout. This is how you should use this indicator in case of a Bollinger Bands Squeeze breakout. If price breaks below the Bollinger Bands Squeeze pattern, then Stochastic Oscillator has to be in oversold area.
MACD is a more delayed indicator. However, it sends a signal long time before price breaks above Bollinger Bands Squeeze. This signal helps us understand in what direction the breakout will form.
As you see in the chart below, MACD bars have been going up for such a long time and while price was moving sideways and even before the Bollinger Bands Squeeze forms. This means bears have been exhausted and were giving the control to bulls. And finally, it was the bulls who took the full control and broke above the Bollinger Bands Squeeze.
So, although MACD is delayed, it informs us about the Bollinger Bands Squeeze breakout direction, long time before the breakout forms.
RSI is a very strong and reliable indicator. While the price was moving sideways, RSI started going up from the oversold area, but still was below the 50 level. However, once the price broke above the Bollinger Bands Squeeze by the 2016.11.13 weekly, and even one candlestick before, RSI broke above the 50 level.
RSI is like that. It usually precedes the important events like breakouts. It is a big help to get ready and then take the strong and valid breakouts.
So, this was how you could use these indicators to take the below Bollinger Bands Squeeze breakout on EUR/JPY weekly chart. I know that the price didn’t go up that much and it only went up for about 680 pips when the the 2016.11.13 weekly candlestick closed above the upper red line (range resistance). But, as I mentioned earlier, we never know how big the after breakout movement will be. All we can do is that we take the valid breakouts and set a proper exit strategy.
Please scroll down and vote whether you like taking the Bollinger Bands Squeeze breakouts with the help of the above indicators, or it doesn’t make sense to you to trade like this.