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Two of the most profitable, particularly when combined with support and resistance are the morning and evening star patterns. These patterns require three candles and they’re easy to recognize.

The evening star is a top reversal pattern. The first candle is a long white one. The second is a star. A star is a candle with a small real body which is white or black. In both these patterns the color doesn’t matter.

The star can also be a doji, a candle in which the open and close are the same. The third candle must be black and it must reach deeply into the first white candle’s real body.

In order for this to be an evening star pattern it must occur after an uptrend. The trader would short on the close of the third candle and place their stop just above resistance.

Here’s an example from the Euro Wednesday morning that led to a nice move. I’ve circled the three candles that make up the pattern. Note that the pair was at resistance—that makes this pattern very important. Because it was at resistance, the trader could set a tight stop, risking very little for what has turned out so far to bring 140 pips.

The morning star is also a reversal pattern but it occurs after a downtrend. The first candle is a long black real body. The second candle is one with a small real body. It can also be a doji. The final candle in the pattern is a white real body that extends deeply into the first candle’s body. Here’s an example from Wednesday morning’s USDCHF three-hour chart. Again, there was another powerful indicator in that the pair was at support. The trader would buy on the close of the third candle.
Think about these two examples. These two pairs are usually negatively correlated, trading in opposite directions from each other. Both showed mirror images of the same pattern. The Euro was at resistance and the Swissy was at support. It was additional confirmation that one or both of these trades could be taken with a high probability of success and with low risk because of the ability to set a tight stop. In Forex trading it doesn’t get much better than that.

Similarly, this trading tool makes use of a simple moving average with its corresponding higher and lower bands that will either expand or contract according to price movements in relation to the average. Traders in most cases use a 20-day average as the middle line or average, and study price movement trends, upwards or downwards, in relation to the 20-day average.

The Bollinger Squeeze is a phenomenon that predicts a major change in the direction of a price movement. The upper and lower bands are the closest to the average middle band on account of meager price movement during the trading period (open and close). However, when price action breaches and subsequently breaks out of a band (upper or lower), it indicates a new price trend. For e.g. if the price breaks out of the upper band then it indicates an upward trend after the gloomy trading period.

On the other hand, if the price breaks out of the lower band, it indicates a downward trend. Fundamentally, another way to look at it is to correlate the gap between the two bands with the length of the bands in a time period. The rule of thumb is that the closer together the bands are, the shorter will be the time that they stay close together.

For a trader, this is a signal that a major price trend reversal in on the cards. When the upper and lower bands are farther apart, it indicates a more volatile market implying a greater propensity for the price action to fall towards the average. However, in many cases the price has also exhibited a jump away from the average when the upper and lower bands expand.

An interesting behavior of Bollinger bands is the “Bollinger Bounce”. According to this, the price movements will eventually always return to the middle band (average) which is because of the balancing act played by the support and resistance levels at each maxim (upper and lower band). These bands therefore indicate a price movement trend. Let us further elaborate on the same.

The greatest disadvantage of the Bollinger bands is its inability to indicate the most suitable phase in a price action trend movement to open or exit a trade or even to initiate buying or selling a currency pair. It only acts an indicator of the trading price volatility. It can only help predict a possible trend and even make a calculated guess on when to expect an anticipated change.

Summary
The Bollinger bands work on three bands- upper, lower and a moving average band. The price fluctuates above or below the moving average indicating volatility in the forex market suggesting price behavior behind a currency pair. The narrowing of the upper and lower bands indicates the likelihood for a major price trend change.