Bollinger bands will help you to forecast giant trending moves, act on big trend reversals and eventually, time trading positions with better accuracy for larger profits. Here we have related Bollinger bands to the foreign exchange markets ( as it is here that they’re most helpful ) – but they’re helpful in all fiscal markets. What are Bollinger Bands? Developed by John Bollinger, Bollinger bands are volatility bands drawn around a straightforward moving average. You figure out Bollinger bands using the standard deviation of price over the same period as moving averages and plotted as lines above and below the moving average. The gap between lower and upper Bollinger bands reflects the volatility of the market traded. Costs may spike short term, but will typically dip back to the long term moving average ( the centre band ) – which represents pragmatic value.
The volatility of the outer bands thus gives us an indicator of how fluctuating costs are – and how far away price is from longer-term value. Most price spikes are caused as much by trader psychology, as the demand and supply background – and this eventuality is mirrored in the idea of Bollinger bands. Why are Bollinger Bands so handy? Bollinger bands perform 3 major functions for traders : one. Noticing a Breakout and New Trend Markets move between low volatility trading ranges, to high volatility trending moves. When a market makes trades in a narrow range, the Bollinger bands will narrow together and this shows a market with very low volatility – however this is a notification that a high volatility trending move is probably going to follow.
When costs break above or below the higher or lower band, it’s an indication that a breakout and trend is preparing to develop – traders will then take a position in the direction of the breakout, and try and ride the trend. Two. Timing Entry Levels in a Trend everyone knows long-term currency trends last for months or years – but we want to get in at the best risk / reward level. Bollinger bands will help in getting you in to the trend and time your entry.
All you do is watch for dips toward the centre band – and enter in the direction of the trend – it actually is that straightforward! To time your entries with higher precision, and filter fake breaks we promote using a momentum indicator – like stochastics, to approve the move. Three. The spacing, or width of the band, is conditional on the volatility of the market, but gives traders a clear appearance of where costs will go, and when to enter. A note of warning! Bollinger bands are a helpful tool – but need mixing with other signals, as with any single indicator, they shouldn’t be utilized in isolation. We personally feel Bollinger bands should be used with basic charting, to get the big picture – and the best timing indicator is the stochastic as mentioned to clear out fake signals.
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