How to use the Bollinger Bands indicator correctly? Tips for beginners

The Bollinger Bands indicator should be used in conjunction with other indicators, one of which is the RSI (Relative Strength Index).

On the same EURUSD chart, we can see that before the beginning of the consolidation phase, the RSI entered an oversold area, and during the consolidation, it exited this area, which might indicate that the pair is ready to continue falling.

Thus, the entry of the RSI into the oversold area along with the bands' contraction is a warning of the forthcoming consolidation phase, while the exit of the RSI from the oversold area indicates the forthcoming end of the instrument's consolidation.

The disadvantages here should include:

1. The presence of RSI in the oversold area is not a 100% signal of the end or pause in the trend. The RSI may remain oversold or overbought for a long time when any instrument decreases or rises, so if a trader opens a position relying on the entry of the RSI in one of these areas, it may incur losses.
2. The exit of the RSI from the oversold or overbought zone during the consolidation phase does not mean the end of the consolidation and either the continuation of the trend or its reversal.

By using moving averages with periods of 50, 100, and 200 a trader will be able to get an idea of the strength of the support or resistance levels, and also a trader gets a probable confirmation of either a down-trend reversal or an up-trend reversal, in case the 50-day moving average crosses the 100-day average, for example.

On the chart of the same EURUSD pair above, you can see how the 50 SMA (black) crossed above - and below the 100 SMA (red) after the price broke through support and continued falling. So in this case the trader got two signals: one is an extension of the Bollinger Bands after the breakdown and a crossover between two moving averages. At the same time, the 200 SMA (yellow) showed where the resistance is quite strong.

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