Benefits Of Using Bollinger Band in Forex

Benefits Of Using Bollinger Band in Forex

Submitted by adil on Mon, 02/04/2013 - 06:02

While one can�trade forex�using various methods, traders have always relied on charting and data. Even though new techniques are developed constantly, the conventional methods are often as popular as they used to be.

Bollinger bands are around 20 years old. However, they are one of the most accurate trackers of volatility in the forex market. It is essential to know the volatility degree, as it can often indicate whether or not a trend is going to reverse.

Bollinger bands make use of the moving average. They create a channel, placing the lower and the upper bands in the range. One needs a candlestick chart or a pricing chart to make the channels and calculate a smooth moving average. Bollinger bands go beyond just this information by providing information on deviations below and above the lines, which identify resistance and support boundaries.

Traders can use Bollinger bands by merely reading the channels, without knowing standard deviation calculations. When the price is in the channel and above the moving average, it is the signal to buy, as the momentum is moving upwards. However, when the price drops below the moving average in the channel, traders should sell, as it is expected to drop.

As we said above, the Bollinger bands indicate the volatility in the forex market, while also indicating the likely direction of the price. This is shown through the channel width. The volatility in the market is directly proportional to the width of the band. This can indicate whether a market will reverse or break out.

"Bollinger bands indicate the volatility in the forex market, while also indicating the likely direction of the price"

One of the most obvious signs of a reversal in trend is when a price breaks through the channel and goes either lower or higher than the calculated standard deviation. This is estimated to happen only in 5% of the total trades. It is a very sure sign of a new trend in the making.

Users can also customize the Bollinger bands by setting their own parameters of the amount of standard deviations as well as the moving average used in creating the channels. Most available charting software is flexible enough in this respect. However, John Bollinger, who created the Bollinger band, firmly believed that the optimum combination required to create the channels was two standard deviations and 20 different reporting periods.

Forex traders will encounter Bollinger bands very early in their trading days. Even though we have much more complex methods available today, Bollinger bands calculate trends and volatility simply, yet effectively, in a real time market.