subject: Trade forex with Bollinger Bands [print this page] Trade forex with Bollinger Bands Trade forex with Bollinger Bands
Bollinger Bands are a technical analysis tool designed to forecast the highs and lows of a particular investment's price. This applies to all tradable investments, whether the investment is in bonds, stocks or foreign currency. This device was first invented by John Bollinger and was a welcome acceptance among many investors and traders.
Now the question arises that what is a Bollinger Band? A Bollinger Band is comprises mainly of three parts:
A middle price also called the moving average, usually calculated over a fortnight. An upper range, or band, which reflects the price movement above the moving average. A lower range, or band, that shows the price progression below the moving average.
Instead of using percentages, the bands are calculated with the help of a standard deviation. By plotting the moving average with the high and low movement ranges on a chart, it is possible to get a practical idea of a stock's high and low prices. With this tool traders can see the development of patterns and act consequently.
You may now think that how Bollinger Bands Are Used? All the different investors have their own explanation and understanding of the Bollinger Bands and how to use the data. There are some traders who will buy only a stock when the price is near the bottom of the lower band and subsequently sell when the price is near the very top of the higher band. Furthermore investors decide to buy at any price in the lower band and sell when the prices reach the moving average or slightly above it.
A very important point is that how it can be viewed when the gap between the two bands is small, traders consider this stock to have very little change, or volatility. On the other hand, when the two bands have a large area between them the stock shows a lot of volatility. Traders watch over at the bands for some period of time to look for a trend in the price. The moving average helps in smoothing out the instability so that traders can clearly see if the true price is moving up or down. When the prices regularly show in the upper band it is normally acknowledged that the stock is overpriced. On the other hand, as the prices frequently show in the lower band then the stock is underpriced which leads in more buys.
Most investors that include the Bollinger bands into their study will start by identifying the upper and lower bands. On a chart, lines will be drawn connecting all of the upper bands and the same will be done for the lower bands. This begins to form a channel that can be seen easily across the chart. The investor can then decide at which points to buy and subsequently sell the stock.
While there are so many Bollinger band techniques existing and have been established to be very dependable. Time and again these slightly more superior strategies involve using Bollinger bands in conjunction with other indicators, but the average trader does not have to resort to these methods in order to glean some useful information on future market direction. These techniques can also turn out to be effective in helping traders choose when to enter and exit the market place. One of these methods is called the broken band technique and it has been proven to be a fairly dependable indicator of a change in market prices and the trends.
Bollinger bands majorly consist of a lower, upper and the middle band. The middle band stands for a moving average which varies with the current price. The upper band represents the overbought area of the security whereas the lower band displays the oversold area of the security. The information which is shown is obviously understandable by all and can be used by novice traders as well as advanced traders. Understanding the bands fully is a simple procedure and traders can see that a good opportunity and time to enter the market is when the price of a security is hitting or approaching the overbought and oversold conditions.
Just as the coin has two sides same is with any trading strategy this Bollinger band technique too is not perfect and there is a drawback that occurs every now and then. Sometimes the serious selling pressures carry on and it is likely that successive candlesticks break the lower band and may bring down the prices drastically.
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