Bollinger bands on forex trading charts are used just as on equities and options trading charts, as an indicator to alert the trader to a new forming movement, breakout or trend. They are made up of three lines or bands.
The middle band is a simple moving average over a specific number of intervals, usually 20. The upper and lower lines are at a certain number (usually 2) of standard deviations calculated referring to the number of intervals used for the center band.
Bollinger bands were invented by John Bollinger in the 1980s. The idea behind them is that prices will predominantly alternate within 2 standard deviations of the base, which here is the moving average used to plot the middle line. This means that as prices reach the upper and lower band lines, a reversal is indicated to maintain the prices within the bands.
They are also an indicator of amplitude. Wider bands indicate a more volatile market than narrow bands.
Traders use Bollinger bands in a number of various ways but these are the two most widespread ones:
1. Pinpointing of overbought and oversold market conditions
On the basis that prices are likely to remain within the bands, several traders will use Bollinger bands as an indicator to sell when the price rises above the upper line and buy when it closes below the lower line. Typically they intend to close their transaction when the price approaches to the central line.
Preparedness is important here, however, as these movements outside of the bands could just indicate a strong trend unfolding in that direction. So you could be stuck on the false side of a powerful trend in some cases. John Bollinger himself recommended all the time examining against another indicator. Probably the most effective for this function are non-oscillating indicators such as trend lines or chart formations.
2. Identification of contraction and foretelling breakout
As we have seen, the bands will diverge and converge based on the volatility of the market over the calculated past intervals. When they converge so that their area becomes narrow, this is called contraction. Some traders will act on the basis that contracting bands is an indicator of a significant breakout and place both buy and sell orders outside the bands.
The risk here is that there can frequently be a misleading break where the prices will stretch outside the bands shortly prior to reversing. For this reason some traders rather do not act on the first move outside the bands. Again you should always check against another indicator on your forex charts, or use forex signals as a checking tool. A forex signal is a market forecast and a trading recommendation, which can be used as a confirmation, especially if comes from a reliable forex signal provider.
Becoming A Successful Foreign Exchange Trader: How To Let Yourself Earn Profits
You will find a lot of information about becoming successful forex trader online, but most of it is about the technical aspects of trading. Of course, these are important, but they are not all that we need to know.
Time And Timing In Day Trades - Comprehending The Cycles And The Best Times To Trade Futures And Forex
It is of utmost importance to understand the time that you choose to trade in, and know what you can potentially expect at that time of day. This differs from instrument to instrument so it is important to study market behavior for your particular instruments.
Practicing In The Currency Markets - Usefulness Of Starting With A Simulation Trading Platform
You will open an online 'account' using the simulation system. You will then be able to read the news, find and compare markets, and you will be able to make 'fake' trades so you can watch your money build or be eaten away by losses
Forex EBooks - Why Are They Necessary To Develop Into A Thriving Foreign Exchange Trader?
Trading eBooks are usually written by experienced and knowledgeable forex traders who are willing to share their secrets with beginners. New traders tend to have lots of questions like how much should they invest, where they should start investing, when they should get out of the trade, etc.
Best Way To Invest Profitably In The Currency Markets
The very first step that you must take is to get the right people to help you with making good and lucrative decisions. First of all, not only find a good forex broker where you do gain a lot of savings from commission fees...
Recognizing Forex Market Trends For More Returns: How To Identify Trend Turning Price Levels As Exactly As Possible
It can take time to learn all the details of trading trends, but you do not necessarily need to know everything to get started and be making money. There are many different ways to use technical analysis to spot a trend.
Mental Aspects Of Foreign Exchange Trading: If You Want To Make Profits, You Must Be Able To Lose
You have probably heard before that it is important not to let your emotions rule your trading. Making decisions based on our feelings of fear, greed or anxiety is a surefire way to lose money in the foreign exchange markets.
Related Articles
Associated Resources