Bollinger Bands vs Pivot Points: Differences, Advantages, and Disadvantages
Most trading websites advise traders to use their gut when making the final decision.
And while that may work for some, it does not work for everyone. That's why one of the smartest things any new trader can do is create a strategy.
Some strategies are simple, and others are more complicated. However, they all share the same foundation, analysis.
Understanding Bollinger Bands and Pivot Points is one of the elements that make a reliable forex trading foundation. And comprehending them will allow any trader to do top-level forex trading.
Created by technical trader John Bolliger during the 1980s, the Bollinger Band is a financial tool based around the standard deviation of an SMA (Simple Moving Average) line. The purpose of using this tool is to determine whether or not a particular commodity or currency is about to hit the peak during a run or about to reach the bottom during a selloff. The way it does this is by using a positive and negative band based on a specific pair or commodity's SMA standard deviation (SD).
For all the brilliance by John Bollinger, his system is not perfect. Bollinger Bands are not a one-size-fits-all trading system. It only provides traders with an indicator of the potential over-value or under-value of a currency. Moreover, because it uses SMA, Bollinger Bands value old trades as much as new ones, which skew and the dilutes the current state of the market. Additionally, setting the SMA to 20-days may create contradictory results, which further affects making accurate predictions without the help of other indicators. Luckily, there is another option.
Bollinger Bands on a 1-hour chart
Cemented in the foundations of technical tradings, Pivot Points are an indicator used to get a grasp of the overall trend of a particular commodity or currency over multiple periods of times. The way this is done by calculating the average price of a currency pair, for example, from the previous day at its high, low, and closing levels. Then, the following day, the averages can be compared to see an ongoing bull or bear market. It is a simple and great way to get a simple analysis without many complications.
Just like with Bollinger, Pivot Points have some flaws as well. This tool does not guarantee that the prices will revert to a level similar to the previous day, creating a distorted view of a perpetual bullish or bearish market. Moreover, under a highly volatile market, Pivot Points will fluctuate too much to be considered reliable. And the simple maths used to calculate the average of the different prices limits a trader's ability to adjust it so it can adapt to different conditions.
15-minute EURUSD chart with daily pivot points plotted
Pivoting Bands while Bollinger Points
At the end of the day, both tools have their advantages and disadvantages. The daily nature of Pivot Points allows traders to get an accurate representation of the market at that moment. Meanwhile, Bollinger Bands gives traders an overall feel for where the market is heading. The best usage for these tools is by complementing each other. By using basic math, any trader will have the ability to create a solid strategy with highly powerful tools.