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Breaking forth in the forex market with bollinger bands indicators
Bollinger Bands indicators are very popular in the Forex market and are used to gauge as well as analyze periods of consolidation. They are also used to establish when a currency is overextended, buy and sell signals, continuation signals and determine price targets as well. Bollinger Bands utilizes statistical concept of standard deviation to get its bands.
Bollinger Bands technical indicators are used to measure volatility in the market. It resembles Moving Average (MA) Envelope indicators in that both form lower and upper bands around a moving average. However, Bollinger Bands indicators incorporate statistics and standard deviation concepts in formation of lower and upper limits. Bollinger Bands were created when most analysts in the Forex market did not comprehend that volatility was a dynamic variable in the market that fluctuated with time unlike Moving Average (MA) Envelope indicators that have a static percentage band. Bollinger Bands technical indicators have 3 lines;
Middle Line (Moving Average)
Higher Band
Lower Band
Interpretation of Bollinger Bands
Standard deviation as it is well known is a statistical measure of volatility. Standard deviation will basically be higher when currency prices are changing drastically in the market and lower when price changing is calmer.
Bollinger Bands widens and shrinks depending on the volatility in the currency market. When the volatility in the market is high the Bands widens while on the other hand if it is low the Bands shrinks.
It is worth noting that volatility in the market is usually high during reversals like bottoms and tops. During a Forex market top, traders are usually euphoric and earning profits or in a state of fear, fearing that their short positions in the trade are not doing pretty well and they stand to lose revenue. As a Forex trader, you must keep in mind that a market top for the first trading currency in the pair is a definite market bottom for the second trading currency in the pair.
Crucial Points When Trading Using Bollinger Bands
When there is an upswing in the market, the prices will remain within the central moving average and the upper band.
When there is a downswing in the market, the prices will stay within lower band and the central moving average.
Currency prices that close below the lower band or above the upper band are signs of trend continuation and not reversal signals.
Currency prices rides on the upper band when there is an uptrend and rides on the lower band when there is a downtrend.
As a Forex trader, you should always wait for the currency price to turn in the opposite direction after touching either lower or upper band before you consider that a reversal will happen.
Conclusion
Bollinger Bands indicators are very popular indicator in the Forex market especially in the contemporary world. However, just like other technical indicators used in Forex trading they should be used with other indicators both technical and fundamental for best results. Using Bollinger Bands exclusively might not be a wise decision, and if you want to make thousands of dollars in Forex market then you have to utilize all the tools that are available to you effectively and efficiently.
Experts have it that Bollinger Bands technical indicators works effectively when used together with oversold/overbought oscillators. Bearing in mind that Bollinger Bands take into account trend and volatility, you should use them with other indicators that will capture momentum, open interest, sentiment and volume to avoid duplication of information.
All the best in your trading!;)
2013-04-02 12:33:18
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