Learn this powerful method of Fibonacci retracement FREE pulling over 500 pips per trade. This is a patented system of Fibonacci forex trading by Tom Strignano, a trader BANK CHIEF EX. Download this highly profitable Forex Breakout Strategy Magic Tim Trush and Julie Lavrin FREE. Get three FREE Swing Trading Systems. Have you used Bollinger Bands in the Forex market? If not, then you should read this article before doing so. Bollinger bands are used to measure volatility in stock price. Working in almost every market and with any type of security. Volatility is measured using standard deviations in the statistics. Therefore, what Bollinger Bands do is trace the standard deviation above and below the simple moving average. A simple moving average is used to smooth price action.
By plotting the standard deviations above and below the moving average you infact create an envelope that show how much volatile the market is. Widening of the bands show that the market is becoming more volatile while narrowing of the bands show that the market volatility is decreasing. BBs are widely used to determine the overbought/oversold condition in the market as well as confirm divergence between the price action and the indicator. Keep these tips in mind when trading with Bollinger Bands (BBs):
1. Bollinger Bands are plotted above or below the simple moving average.
2. The default settings for the Bollinger Bands simple moving average is 20 periods.
3. The default settings for the two bands is two standard deviations above or below the simple moving average. These bands keep on increasing and decreasing in width as the market volatility increases or decreases.
4. Now this very important if you change the number of periods simple moving average, you should change the standard deviation of the bands too. For example, if the period is increased to 50, increase the standard deviation of two and a half and if you reduce the period to 10, decreased the standard deviation of one and a half. Periods of less than 10 does not seem to work well. Period of 20 or 21 is the optimal value.
5. You can use any timeframe for using Bollinger Bands that can vary from 5 minutes to daily to weekly or monthly.
6. Rapid price movement tends to take place after the bands tighten.
7. Prices moving above the upper BB is a sign of strength and prices moving below the lower BB is a sign of weakness.
8. When prices move outside the band, tend continuation is a good assumption.
9. A move outside the band followed by a sharp retracement is a sign of price exhaustion.
10. Always use another technical indicator when trading with BBs. One technical indicator that works very well with BBs is the RSI.
There are a number of trading strategies that employ BBs.