Bollinger bands for forex trading are a great tool. Why? Because they help you deal with a major problem all traders face - dealing with volatility. Knowing how to execute trading signals taking into account high and low volatility is the reason Bollinger Bands are such a great indicator for forex traders.
Introduction
John Bollinger developed the bands and they carry his name and are featured on all standard charting packages. They simply give an indication of volatility and standard deviation of price from the mean and there very easy to use.
What They Show You
They are defined as volatility bands which are shown either side of a simple moving average. You have a trading envelope - with a middle average price and 2 x bands (expanding or contracting all the time) either side that gives you a snapshot of the volatility present in the currency.
How to Use Bollinger Bands
In any market, the value of a currency traded tends to rise slowly over the longer term in line with a long term average.
Of course the price ebbs and flows in the short term, as traders drive prices to far up or down, when greed and fear are to the fore and prices become overbought or oversold.
These short term price spikes characterized by high volatility don't last long and prices will normally return to the longer term moving average.
The standard deviation of the outer bands (how far they are from the average mean) shows how far prices have moved from the long term moving average or fair value.
Bollinger bands simply tell you how volatile the market is at a glance as you can see how far the outer bands are from the average.
There are various ways a forex trader can use Bollinger Bands.
1. Trading Greed and Fear
When the bands are a long way from the mean average price you can use Bollinger bands to exit the market and lock in profits. In certain scenarios they can be used to enter contrary positions to the existing trend - either looking for a swing trade opportunity or new trend
2. Enter Trends in Motion
A strong trend when in motion will tend to have dips back to the mid band and these can be used to enter new positions in line with trend line support and resistance. Look how in any strongly trending currency the mid band provides a low risk buying opportunity.
3. As a Warning
When prices are trading in tight range and volatility is low you can be on the look out for a price breakout. In currencies low volatility tends to be followed by higher volatility and this can be a warning of a new trend.
Therefore a change from low to higher volatility, gives advance warning that this volatility will create a new trend.
Using Them Correctly
Bollinger bands should not be used on there own or to enter trading signals or for market timing - they are used to give you an idea of volatility and indicate value.
Bollinger bands work best when combined with good old fashioned trend lines, with momentum indicators used to confirm the trading signal.
If you want to win at forex trading and make consistent long term profits, you need to deal with volatility and Bollinger Bands can help you do just that by indicating overbought, oversold levels and areas of value.
Make Bollinger Bands an essential part of your forex education and learn how to use them correctly with momentum oscillators and trend lines and they can lead you to greater profits. Simply, a great tool all forex traders should have in their armory.
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