Modernization of technical indicators commonly used in Forex trading is considered commonplace. This is advisable as analytical tools need to adapt in a timely manner to apparent changes in market conditions. This practice makes it possible to simplify the trader’s work, expand the functionality of the analysis tools used, and also significantly increase the accuracy of the generated signals. A good example is the BBands Stop indicator, which is a more modern, improved version of the classic BollingerBands tool, which has earned immense popularity among Forex traders. First of all, the adjustments made affected the form of the visual display of this indicator on the working chart.
Description and application features of the indicator
To better understand the key features and advantages of BBandsStop (Figure 1), you should compare it with the usual Bollinger Bands (Figure 2), the practice of which has a very long history of using in Forex. The description of the BBands Stop indicator is based on its comparison with BollingerBands – it is obvious that there is a close connection between these instruments.
Figure 1. BBandsStop on a work schedule
Figure 2. Classic BollingerBands on a quote chart
Figure 3 shows the BBandsStop and BollingerBands indicators with similar parameters on one working chart, which allows you to visually analyze their similarities / differences. A comparison like this will help you get an idea of how BBands Stop works:
- As you can see, BollingerBands operates with three lines – the upper channel limit, the middle line, and the lower channel limit. BBandsStop for each period shows only one line, which is located below or above the rate.
- The BBandsStop line changes its position relative to the market rate (price) only when the price crosses (breaks through) this line in a downward or upward direction.
- The BBandsStop line coincides with the corresponding BollingerBands limit only when this limit approaches the market rate. The rest of the time, you can observe only the horizontal movement of the BBandsStop line.
Figure 3. BBandsStop and BollingerBands on the same chart
The BBands Stop indicator refers to trend analysis tools, since the location of the line of this instrument relative to the quotes on the working chart helps to identify the priority direction of the rate dynamics, that is, the current trend of the target market.
Figure 4. BBands Stop is considered a trending analysis tool
The peculiarity of this kind of analytical tools is that they often give erroneous signals during lateral course dynamics. Accordingly, it makes sense to be guided by their readings only when the target market is characterized by a pronounced trend and high volatility. To trade in a flat, it is recommended to supplement BBandsStop with other indicators that can correctly identify the horizontal movement of the target market.
In addition, BBands Stop, like most trending instruments, has a clear tendency to generate lagging signals. This is especially true for those circumstances when the market trend changes – reverses, corrects or goes sideways. The absolute value of such a lag, however, can be adjusted by appropriately changing the settings of the analytical instrument. As a rule, such a lag is negatively manifested if a trader is looking for an entry point. A lagging signal to execute a trade may occur when the market has already turned around a long time ago and has passed a significant part of its path in a new vector. That is why the readings-signals of this indicator should always be carefully checked and additionally confirmed.
An important advantage of the considered trend instrument is the high reliability of the signals given under the favorable circumstances mentioned above (the presence of a trend, market dynamics). With proper management of trading capital, which implies a reasonable determination of the volume of each position and protective orders ( StopLoss / TakeProfit ), you can often make profitable trades.
The following settings of the considered analytical instrument are subject to change:
- Length – the number of candles (sessions) used to calculate BBandsStop values. The higher the value of this parameter, the less trading signals will be generated by the system for a certain time, and the more reliable recommendations will appear in their total number. This is the basic setting.
- Deviation is a parameter that determines the sensitivity of an analytical instrument to the volatility of the target market (by analogy with BollingerBands).
- MoneyRisk is a parameter that characterizes the degree of acceptable trading risk. Predetermines the distance between the market rate and indicator values on the working chart when generating a signal. The degree of their convergence directly depends on the value of this coefficient.
- Signal – the method of visualizing the generated signals on the quotes chart is selected. If the parameter is set to 0, all points will be the same size. A value of 1 – the starting point has a larger diameter than the rest. Value 2 – only the starting point is displayed, after which the line is drawn.
- Line – option for displaying lines connecting points on the chart. A value of 0 is unnecessary. Value 1 is needed.
- Nbars – the total number of sessions (candles) that make up the billing period.
Figure 5. Analytical instrument settings
Principle of operation
The simplified perception of the algorithm used by the analyzed analysis tool is as follows:
- The values of the three BollingerBands curves are calculated.
- The position of the market rate relative to the center line (central curve) of BollingerBands is specified.
- If a particular candlestick (session) ends above this middle line, BBandsStop points are plotted along the BollingerBands lower limit curve. If a particular candlestick (session) ends below this middle line, the points of the indicator in question are drawn along the curve of the upper limit of the Bollinger Bands. This algorithm is illustrated in Figure 3.
How to use in trading
First, you need to download the BBands Stop indicator for the MetaTrader4 online terminal. Then its file should be moved to the Indicators directory of the Internet platform. Installation of this instrument on the working schedule is carried out in the usual way (according to the standard instructions).
First of all, you need to wait for the indicator line to move relative to the market price in an upward (bottom-up) or downward (top-down) direction. This moment signals a change in trend, which, however, can be considered final only after the completion of the candlestick that caused this movement (Figure 6). A downward movement of the indicator line gives a BUY signal, an upward movement – SELL.
Figure 6. Using BBandsStop in trading
It is recommended to position StopLoss in the immediate vicinity of the indicator points. The TakeProfit order is placed with an orientation to the StopLoss level, taking into account the degree of risk of the applied trading method. It is not recommended to make deals with significant StopLoss / TakeProfit values, since the risks in this case will be very high.
BBands Stop Alert modification
The BBands Stop Alert indicator is characterized by the presence of graphical display and sound alert options used when a trend reversal signal appears. When the system detects the fact of a trend change, it informs the trader about this by visual indication of arrows of the corresponding direction on the screen of the online terminal. In addition, the system gives the analyst a characteristic sound signal indicating a reversal of the target market and the possibility of a SELL / BUY transaction.
Forex indicator BBands Stop is an effective tool for trend analysis. However, its signals should be guided only in those cases when they are clearly confirmed by the readings of other filter indicators. It should also be borne in mind that this indicator can both lag behind a trend change and give erroneous signals when the market is moving sideways. It should be noted that the tool in question is a modification of the Bollinger Bands, which have long been well established in Forex.