A forex trading strategy defines how you will enter and exit trades, by using technical indicators to identify key price levels. While there are hundreds of strategies, we concentrate here on the most important in our experience for short term trades.
Bollinger band forex strategy.
Ok, it's not the Champaign.
What Is a Bollinger Band®?
A Bollinger Band® is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security's price, but which can be adjusted to user preferences.
Bollinger Bands® were developed and copyrighted by famous technical trader John Bollinger, designed to discover opportunities that give investors a higher probability of properly identifying when an asset is oversold or overbought.
A Bollinger band strategy is used to establish likely support and resistance levels that might lie in the market.
The Bollinger tool consists of three bands: the central line is a simple moving average (SMA) set to a period of 20 days, while the upper and lower lines measure the volatility on the market. If the forex market is highly volatile, the bands will widen, and if the market is more stable, the bands will get closer together. When the price reaches the outer bands of the Bollinger, it often acts as a trigger for the market to rebound back towards the central 20-period moving average.
Forex traders can identify possible points of support and resistance when the price moves outside of the Bollinger band. When this happens, either the market will break out of its range, or the move will be temporary and eventually the price will return to the direction it came from. The bands help forex traders establish entry and exit points for their trades, and act as a guide for placing stops and limits.
The first step in calculating Bollinger Bands® is to compute the simple moving average of the security in question, typically using a 20-day SMA. A 20-day moving average would average out the closing prices for the first 20 days as the first data point. The next data point would drop the earliest price, add the price on day 21 and take the average, and so on. Next, the standard deviation of the security's price will be obtained. Standard deviation is a mathematical measurement of average variance and features prominently in statistics, economics, accounting, and finance.
For a given data set, the standard deviation measures how spread out numbers are from an average value. Standard deviation can be calculated by taking the square root of the variance, which itself is the average of the squared differences of the mean. Next, multiply that standard deviation value by two and both add and subtract that amount from each point along the SMA. Those produce the upper and lower bands.
Here is this Bollinger Band® formula:
BLOU=MA (TP,n)+m*σ [TP,n] BLOD=MA (TP,n)-m*σ [TP,n] Where − BOLU = Upper Bollinger Band BOLD = Lower Bollinger Band MA = Moving Average TP (typical price) = (High + Low + Close) ÷ 3 n = Number of days in smoothing periods (usually 20)
What Do Bollinger Bands® Tell You?
Bollinger Bands® are a highly popular technique. Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.
The squeeze is the central concept of Bollinger Bands®. When the bands come close together, constricting the moving average, it is called a squeeze. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade. However, these conditions are not trading signals. The bands give no indication when the change may take place or in which direction the price could move.
Approximately 90% of price action occurs between the two bands. Any breakout above or below the bands is a major event. The breakout is not a trading signal. The mistake most people make is believing that that price hitting or exceeding one of the bands is a signal to buy or sell. Breakouts provide no clue as to the direction and extent of future price movement.
Limitations of Bollinger Bands®
Bollinger Bands® are not a standalone trading system. They are simply one indicator designed to provide traders with information regarding price volatility. John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals. He believes it is crucial to use indicators based on different types of data. Some of his favoured technical techniques are moving average divergence/convergence (MACD), on-balance volume, and relative strength index (RSI).
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