Bollinger bands are the most popular technical indicators used for trading forex. These bands were developed and popularized by John Bollinger and have been used by traders all over the world due to their effectiveness.
You may be able to improve your trading significantly when you use these bands to analyse the forex market. It can help you take advantage of the many trading opportunities that are available in the market.
Understanding Bollinger bands for trading forex
If you want to use Bollinger bands for trading forex it is important that you gain a complete understanding of what they are so that you may be able to use them in an effective manner. The bands consist of three bands and these include the middle band, upper band and lower band.
The middle band has a twenty period moving average of close price, the upper band has a middle band apart from two standard deviations, and the lower band has a middle band and two subtracted standard deviations. In the foreign exchange market, standard deviation helps measure the volatility of the currency pairs that you wish to trade.
You can make use of the band to see the price of a currency in relation to its range and volatility. It is used to define the support and resistance levels. You may be able to improve the quality of your trading when you use the bands to analyse and place a trade. For long trades the price is usually near the lower band and for short trades the price is near the upper band.
Trend and range can be identified when you use the Bollinger band for trading forex. You may be able to customise your trading style depending on the range and trend. The period used to determine the moving average is usually twenty periods. If you use a shorter moving average it can help identify the short term changes in prices whereas the long-term average is considered less volatile.
Using Bollinger bands for trading forex
Price extremes in the foreign exchange market can be identified easily when you use these bands for analysis. If you look carefully at any trend you may notice that the prices tend to correct, then retrace, and then continue to change. When the price corrections take place you may notice that the bands stop at the upper band in a downtrend and a lower band when there is an uptrend.
You may be able to identify the price levels at which you can open a new position based on the prevailing trend in the market. As the forex market is volatile you can use the bands to identify periods of extreme volatility and this can help you time your trade in an effective manner.
You may also be able to identify periods when there is low volatility. This can help in determining good trading periods when you may be able to make regular returns on your investments. It can also help in minimising the risk of trading in the volatile forex market.