Forex Trading Basic

Technical Analysis with Bollinger bands Indicator

Marker Sentiment Analysis - Forex Trading Strategy

Technical Analysis with Bollinger bands Indicator: 

Bollinger bands

 Technical Analysis with Bollinger bands Indicator

The Bollinger bands consist simply placing two areas fluctuation around a moving average, so that is included in the area between both bands two standard deviations above and below the moving average, which is usually the 21 days.

Although regular use leads to interpret if the price touches the top of the band is seen as overbought, and its tendency is to return to the mobile sooner or later media, and if they are at the bottom of the band prices will oversold, the reality is that the Bollinger bands have their main use in the determination of market volatility.

The separation between bands no longer tells volatility studied product (it represents 4 standard deviations from the period determined by the moving average chosen). That is, if the bands are far apart, volatility will have been significant, whereas if the bands are close together, volatility will have been reduced, and therefore could be expected at any time the beginning of a new trend movement.

However, we must be very careful about using touches to the Bollinger bands as signals to buy or sell, because we would be assuming that the price structure follows a statistical distribution known (Bollinger bands are pure statistics on the past, mean and standard deviation), which is not true at all.

Bollinger bands are bands that are placed on the price chart, above and below average prices. The distance up and down the average prices will depend on the price volatility. If there is a lot of volatility, the distance will be higher, and vice versa.

Volatility is a concept that represents the variability of a data set. Volatility is a relative concept. To intuitively understand the concept of volatility we provide the following examples of data sets:

Series A: 100, 101, 100, 99, 98

 Series B: 100, 110, 87, 60, 100

Graphically, this series will look like this:

 Technical Analysis with Bollinger bands Indicator

In this case, the B series is more volatile or has greater variability than the series A. A statistical concept used to measure the variability of a series is the standard deviation. The distance Bollinger bands up and down the average price are calculated using the standard deviation, for example two standard deviations up and two down. The average price is a simple moving average.

 Technical Analysis with Bollinger bands Indicator

Then, the parameters required building Bollinger bands are:

1- The number of standard deviations: the higher this parameter, more remote bands are average prices.

 2 The number of periods to calculate the average price: the higher the number, the smoother the moving average prices.

Examples of parameters: 

Period: 20 – Deviation: 2

 Technical Analysis with Bollinger bands Indicator

Period: 10 – Deviation: 2

 Technical Analysis with Bollinger bands Indicator
Period: 20 – Deviation: 4

 Technical Analysis with Bollinger bands Indicator
Bollinger bands have several applications and interpretations, and its use varies among traders. Some may interpret the fact that prices touch the lower band as a buy signal, others when prices are between the moving average and the lower band and sell when prices are between the moving average and the upper band. On the contrary, some traders remain “long” when prices are near the upper band and sell when prices move away from it downward to enter “short” when prices touch the lower band. As you can see, this strategy is the opposite of the previous one. You should analyze and develop a strategy itself, but note that Bollinger bands should be used in conjunction with other indicators.

As mentioned above, the width of the bands indicate market volatility. When the bands are relatively close together, the market is quiet, either because prices do not vary much, either because they follow a trend to the same “speed” without “accelerated” or “slow down”. When the bands are separated, there is more volatility in the market.

 Technical Analysis with Bollinger bands Indicator

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Please note that: Successful Technical Analysis largely depends on the functionalities of the MT4 Platform provided by your broker. If you are new in forex trading, you might consider reading the article on what is the best trading platform, Introduction to MT4 Platform and MT4 Platform functions. We have used a fully functional MT4 platform provided by HYCM Broker. Read why their MT4 platform has better trading conditions from the HYCM Broker review.

READ MORE

Chapter 5

Technical Analysis in Forex Trading

Lesson 1Types of Technical Analysis Indicators
Lesson 2Forex Trading Trendline Analysis
Lesson 3Forex trading Chart Patterns
Lesson 3.2Double Tops and Double Bottoms
Lesson 3.3Head and Shoulders Pattern
Lesson 3.4Rectangle Chart Patterns
Lesson 3.5Triangle Chart Patterns
Lesson 4Japanese candlestick Trading Strategy
Lesson 4.2Japanese candlestick Trading Strategy Part 2
Lesson 5Support and Resistance Levels
Lesson 6Types of Technical Analysis Indicators
Lesson 6.2moving averages Technical Analysis
Lesson 6.3MACD Indicator Technical Analysis
Lesson 6.4RSI Indicator Technical Analysis
Lesson 6.5Stochastics Indicator Technical Analysis
Lesson 6.6Technical Analysis with Bollinger bands Indicator
Lesson 7Fibonacci Retracement Forex Strategy
Lesson 8Forex Trading Pivot Strategies

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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