Forex traders are always looking for any advantages which could lead them to greater profits from trading in the currency markets. Along with looking at the fundamental economic drivers affecting currency prices, but also utilizing technical analysis and technical indicators. One of the most popular indicators is Bollinger Bands.
What Are Bollinger Bands?
The Bollinger Band was created by the famous trader John Bollinger. The indicator consists of two “bands” which are mapped out on chart. The two bands sandwich the price of the particular currency pair. The bands are two standard deviations away from a simple moving average. Standard deviation is a measure of historical volatility. Therefore, the more volatility the wide the Bollinger Bands will be.
How Forex Traders Use Bollinger Bands
Currency traders use Bollinger Bands primarily as a way to spot overbought and oversold levels from which price may be likely to reverse direction. This strategy generally works well in range bound markets that consistently remain in a specific range. In range bound markets price tends to bounce off the bands, similar to a bouncing ball between two walls.
On the other hand, just like any other technical indicators, Bollinger Bands are not perfect in predicting future price movements. Even the creator the indicator has acknowledged that the price touching a band should not be automatically considered a buy or sell signal. Instead, forex traders should confirm potential signals through use of other technical indicators, chart patterns and economic fundamentals.
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Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.
Sources:
http://www.investopedia.com/walkthrough/forex/intermediate/level4/bollinger-bands.aspx
http://www.investopedia.com/terms/b/bollingerbands.asp
http://www.investopedia.com/terms/s/standarddeviation.asp
