By Forex Mansion
One of the most exceptional ways to trade on the Forex market is with the use of Bollinger Bands. These bands indicate volatility based on the standard deviation and are set in relation to the moving average. To learn about the history of Bollinger bands, have a look at the original Bollinger site. Essentially, as the volatility increased or decreases, the bands reflect off of the moving average and expand or shrink to indicate the directional movement of volatility. The bands are calculated as follows:
• Lower Band: The 20-day Simple Moving Average less two times the 20-day standard deviation of the price.
• Middle Band: Only the 20-day Simple Moving Average
• Upper Band: The 20-day Simple Moving Average plus two times the 20-day standard deviation of the price.
On a chart, the three lines described above will explain the variation in price and allow for an educated trend outlook to be made. The amazing thing about the Bollinger Bands is that they can be adjusted according to the specific trading style or currency. This means that if there is a currency that is subject to an extremely high rate of inflation, that it can be adjusted to understand the movements and deviations accurately.
For longer periods of time, the Simple Moving Average is recommended by Bollinger to be adjusted as follows:
• 10-day period SMA: The standard deviation should be adjusted by increasing the multiplier to 1.9 fro 2.
• 50-day period SMA: The standard deviation should be adjusted by increasing the multiplier to 2.1 from 2.
There two major signals that should be recognized when using Bollinger Bands, which will allow for a good analysis of information and assessment of patterns: M-Tops and W-Bottoms. Before trying to identify the M-tops, the price must be in an uptrend or else the formula will not show itself on the graph.
• M-Tops. The stipulations for M-Top formations are as follows:
o The first close must be outside the upper band
o The price should then correct and close below the Middle band
o The price should have an increase in volume but not enough to close above the Upper band.
o To use the stop loss function properly using this information, it must be kept at the high. Feel free to increase the stop loss as necessary when the risk and reward seem off-balance.
• W-Bottoms. The stipulations for W-Bottom formations are as follows:
o The price must begin in a downward trend for the W-Bottom to work
o The first close must be below the lower band
o The price should then increase and close above the Middle band
o The price should then drop again but not below the lower band. Finally, it must close above the Middle band on the increase trajectory.
o For activating a stop loss, it must be kept at the low of the W-Bottom.
Using these tools allows one to improve his style through better technical analysis of trends and even find a way to incorporate robots or automated investment tools into his system.
About the Author
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