Forex traders used lot of fundamental data and technical analysis tools for predicting trends in the currency market. Technical charting is the most powerful tool that enables traders to take instant decision in the live and highly volatile market. Based on market experience, traders used a number of technical indicators that give them timely buy and sell signals, and also determine the trend of forex market in future. One such widely used technical indicator is Bollinger Bands. In this article we will discuss about this tool in detail.
About Bollinger Bands:
Bollinger Bands are technical tools that perform on the basis of moving averages and standard deviations. There are three vital elements of this indicator. They are classifies into moving average, upper band and lower band. Here generally 20 day MA is used for analysis purposes. The upper band depicts two standard deviations that are above the MA value. These standard deviations are calculated from 20 periods of the closing forex prices. The lower band on the other hand, shows two standard deviations, here again calculated from 20 period of closing forex prices. These are normally below the MA value.
Playing the bands in Forex:
This strategy in interpreting Bollinger bands is based on the concept that the closing prices (majority) must be between these bands. It is normally assumed that if the forex price is moving below the Bollinger band and falling, then it should reverse and come within its range, thus traders must eye buying at this price. On the other hand, if the prices are moving in upward direction and crossing the band from above level then trader must decide on selling.
The breakout strategy:
This strategy is just the opposite of playing the band strategy. Here breakouts in forex prices above or below bands occur after a period of consolidation. Market experts suggests that traders while using this indicator, must also plot support and resistance levels, as that may help in deciding on entry and exit signals based upon band breakouts. A buy signal is suggested when the forex price breaks above the upper band after a consolidation period, and sell signal is indicated when the prices are crossing lower bands, after consolidation.
Strategies based upon option volatility:
Bollinger bands adapt the volatility in the forex market, thus it gives good advice to traders on expensive and cheap options in the market, based upon high and low volatility parameters. Traders buy cheap options with the expectations that market will improve and that they will sell at a higher price. Similarly, they sell options at high prices with the view of buying at low prices. Thus, in this strategy traders should sell options in high volatility and buy back when the volatility element is low in the market.
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