This article will cover the use of Bollinger Bands and Simple Moving Average. How can both indicators create a combo strategy? How effective is it to spot profitable opportunities?

Combining Bollinger Bands and SMA for Forex Trading

The Bollinger Bands was developed in 1980 by John Bollinger, a technical analyst. Today, this indicator is very popular and widely used in various trading instruments including currencies. At times, the Bollinger Bands is paired with the Simple Moving Average (SMA) in one "package" as the two indicators are complementary to each other.

Both indicators have simple displays on the trading platform while providing a lot of information to traders. Both are simple and relatively easy to understand, thus, it is advisable that beginners try these related indicators first before experimenting on other more complex indicators. So, how do we use the information provided by the Bollinger Bands and SMA?

 

How to Set Up Bollinger Bands and SMA on a Chart

Setting up Bollinger Bands and SMA on a chart involves using a charting platform or software that supports technical indicators. Here's a step-by-step guide on how to do it on TradingView:

1. Once you have your desired trading pair or stock chart displayed, locate the "Indicators" button at the top of the chart.

How to Set Up Bollinger Bands and SMA on a Chart

 

2. In the indicators window, type "Bollinger Bands" in the search bar. The Bollinger Bands indicator should appear in the results. Click on it to add it to your chart.

How to Set Up Bollinger Bands and SMA on a Chart

 

3. Next, go back to the indicators search bar, type "SMA" and click on "Moving Average Simple" when it appears in the results. You can simply click on it again to add another SMA to the chart.

How to Set Up Bollinger Bands and SMA on a Chart

 

4. Once your chart appears as shown, you can adjust the indicator's configuration. Hover your cursor over the indicator in the top left corner, then click the gear icon to access the "Settings" menu.

How to Set Up Bollinger Bands and SMA on a Chart

 

5. After that, select the "Input" submenu, and you can enter the configuration. If you want to set up SMA 28, you can change the numbers to 28, then click "OK". Do the same to set up SMA 26.

How to Set Up Bollinger Bands and SMA on a Chart

 

6. That's it. Your final chart will look something like this.

How to Set Up Bollinger Bands and SMA on a Chart

 

Combining Bollinger Bands and SMA

Bollinger Bands is better combined with other indicators that help determine the right entry point. You can use confirmators that read the price patterns or any other technical indicator.

If you prefer the latter, two SMA lines can be utilized to confirm the Bollinger Bands. We can make use of the crossing between the two SMAs as the reference to enter a position, while the Bollinger Bands is used to predict the range of support and resistance level.

The Bollinger Bands can also be used to place the Stop Loss and Take Profit levels. Let's take a look at the AUS/USD chart below that applies the combination of Bollinger Bands, 48 SMA as the slow SMA, and 26 SMA as the fast SMA line.

BB and SMA combo strategy

By following the rules of SMA crossing and Bollinger Bands, we can conclude that:

  • If the price touches the upper band and the fast SMA crosses the slow SMA from above, it is recommended to short the currency.
  • If the price touches the lower band and the fast SMA crosses the slow SMA from below, it is better to long the currency.

 

Pros Cons Combining Bollinger Bands with SMA

Combining Bollinger Bands with SMA can be a powerful approach to technical analysis, as it leverages the strengths of both indicators. However, like any trading strategy, it also comes with its own set of pros and cons. Let's take a look:

 ✔️Pros ❌Cons
  • The SMA helps identify the overall trend direction. When the price is above the SMA, it indicates an uptrend, and when below, it suggests a downtrend. This provides a simple and effective way to determine the market's primary direction.
  • Bollinger Bands help visualize market volatility. The expansion and contraction of the bands indicate periods of high and low volatility, respectively. Traders can use this information to gauge potential price breakouts or reversals.
  • Bollinger Bands can also provide reversal signals. For example, when the price moves beyond one band and then retraces, it can signal a potential reversal, especially if it aligns with the SMA's trend direction.
  • Combining Bollinger Bands with SMA can be helpful in confirming price breakouts. A breakout outside the Bollinger Bands, accompanied by the SMA trend confirmation, adds strength to the trade signal.
  • Both the Bollinger Bands and SMA are lagging indicators, which means they rely on past price data. As a result, they may not always provide timely signals during rapidly changing market conditions.
  • In ranging or choppy markets, the combination of Bollinger Bands and SMA may generate false or whipsaw signals, leading to losses for traders who enter positions based on such signals.
  • The settings of the indicators are not universally optimal. Traders may need to experiment and adjust the settings to suit their trading style and the specific financial instrument they are analyzing.

 

Final Words

The Bollinger Bands is a technical indicator with primary functions to measure volatility and gauge trend direction. Yet, this indicator can also be used to identify whether the market is overbought or oversold, so the traders can expect when the next price reversal will occur.

The short explanation above gives you a basic idea of how to apply the Bollinger Bands and SMA in the simplest way. Every trader may have their own method to make use of the information from technical indicators.

For that, don't be shy to try and find your own best trading recipe that suits your style and needs the most. The important thing is, don't try any new strategy in a live account.

Try to use a forex demo account instead as your experiment playground so you will have no real risk when trying out new trading techniques.