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Competition in the forex market can be brutal. Trading on gut instinct alone isn’t the smartest market strategy when it comes to maximizing your profits. One of the first things most new forex traders learn is the importance of strategy combined with useful tools.
Some strategies are very complicated and beyond the scope of the beginner or even intermediate forex trader. Likewise, some tools necessitate programming algorithms using Python, C++, R, Matlab or other quantitative programming languages.
Pivot Points vs Bollinger Bands
Fortunately, there are a couple of tools that many forex traders use to enhance their trading. These are the Bollinger Bands and the Pivot Point Indicator.
Bollinger Bands
Bollinger Bands are a popular technical analysis technique. Basically, they are bands two standard deviations above the moving average and two standard deviations below the moving average. They are very useful in determining the trading range and volatility of a currency pair.
As volatility in the market increases, the bands expand, and when the market volatility decreases, the bands shrink. The bands also provide guidance as to pricing trends since prices tend to meet resistance as they approach the upper band and find support as they reach the lower bands.
Pivot Point Indicators
A pivot point is a price point that represents a possible change in pricing direction. It is calculated using a formula that includes the previous day’s high, low, and close. The pivot point represents a point of resistance or support in the market. By knowing where the pivot points are, traders can utilize several strategies to take advantage of them.
One of these is the pivot point bounce where traders can trade on the pivot point and take advantage of a change in price direction. Another is the pivot point breakout where traders can bet that their currency pair is going to break through the resistance or support and make significant gains.
Bollinger Bands vs. Pivot Points
On the surface, it may seem like Bollinger Bands, and Pivot Points do pretty much the same thing. This isn’t entirely true. Yes, they are both useful in determining areas of pricing resistance and pricing support, and both can be utilized by beginner traders, but that is where most similarities end.
Bollinger Bands are not an adequate stand-alone trading tool. They don’t provide the actual trading signals needed to make a trade. They are most useful for providing market information that can be used to complete an analysis of market conditions.
Pivot points, on the other hand, are a useful forex market trading indicator. You can base your trading signals on a specific pivot point, either as a pivot point bounce or a pivot point breakthrough.
They are not useful in giving an overview of the general direction of the market. Since they are specifically just points representing possible price direction changes, they aren’t good at looking at longer term trends. Bollinger Bands are very good at viewing longer term trends in pricing since they represent bands around a moving average.
Another key difference between Bollinger Bands and the pivot point indicator is how they present market sentiment. When a price moves above or below a pivot point, day to day market sentiment can be gauged. With Bollinger Bands, major market sentiment can be gauged when prices break through the bands, and these are only during major market events.
Which is the Most Accurate Forex Indicator?
It really depends on what you specific forex trading needs are and your current strategy. As you learn about forex trading, you will find that your needs change. For example, if you like to play the daily market ups and downs, then pivot points can be a very important tool in your trading arsenal. They can help you make those trades multiple times a day on known pivot points.
If you are a long-term trader, then Bollinger Bands can help you gauge market trends and determine whether the market is oversold or undersold. They can help you determine when you might want to enter or leave the market. They can provide the real information you need.
Savvy forex traders will utilize both indicators in their technical market analysis tool chest. Since Bollinger Bands provide a good look at the market overall and provide areas of resistance and support of a more long-term nature, they can be integrated with pivot points quite well. By combining these tools, traders get the best of both worlds. They can trade for trends as well pivot point bounces and breakthroughs.
Imagine this scenario: The price is moving towards the upper Bollinger Band. Your pivot point is actually above the band. How do you play this trade? However you play it, your choice has been enhanced by your knowledge of both these market indicators.
Pivot points and Bollinger Bands are both powerful forex market indicators that can help your trading strategy. They are simple to calculate and easy to understand. They can be used as standalone with other strategies or combined to enhance your trading. Whichever you choose, your trades will be based on better information.
