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:
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.
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
Period: 10 – Deviation: 2
Period: 20 – Deviation: 4
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.
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.
Technical Analysis in Forex Trading
|Lesson 1||Types of Technical Analysis Indicators|
|Lesson 2||Forex Trading Trendline Analysis|
|Lesson 3||Forex trading Chart Patterns|
|Lesson 3.2||Double Tops and Double Bottoms|
|Lesson 3.3||Head and Shoulders Pattern|
|Lesson 3.4||Rectangle Chart Patterns|
|Lesson 3.5||Triangle Chart Patterns|
|Lesson 4||Japanese candlestick Trading Strategy|
|Lesson 4.2||Japanese candlestick Trading Strategy Part 2|
|Lesson 5||Support and Resistance Levels|
|Lesson 6||Types of Technical Analysis Indicators|
|Lesson 6.2||moving averages Technical Analysis|
|Lesson 6.3||MACD Indicator Technical Analysis|
|Lesson 6.4||RSI Indicator Technical Analysis|
|Lesson 6.5||Stochastics Indicator Technical Analysis|
|Lesson 6.6||Technical Analysis with Bollinger bands Indicator|
|Lesson 7||Fibonacci Retracement Forex Strategy|
|Lesson 8||Forex Trading Pivot Strategies|