Indicator | by ForexCycle.com | Tuesday, 20 January 2009 06:54 UTC
Discovered by John Bollinger, the Bollinger Bands is a simple moving average based tool that allows people in Forex trading to estimate the instabilities and trend in the Forex market. Let us have a brief look at the concept of Bollinger bands and how you can use it to improve your Forex trading strategy.
What are Bollinger Bands?
Bollinger bands consist of two volatility bands enveloping either sides of a simple moving average. The bands are calculated based on the standard deviation of the price during the same period as the moving averages. This standard deviation is plotted on either sides of the moving average. The distance between the upper and lower Bollinger bands shows the standard deviation of price or the volatility of the currency traded. As this price volatility increases, the outer bands move further away from the longer-term average. If the volatility decreases the bands move closer to the moving average.
Normally, the price increases slowly with time, but sometimes due to nervous or greedy traders, the price will spike suddenly. Such spikes will not last for long and the prices will normally come back to reasonable values (or the moving average of the Bollinger bands). Such instability of the outer bands will give an indication to traders on the volatility of prices and the extent of variation of the price from the normal value.
Using Bollinger Bands in Forex trading:
Success in Forex trading has a lot to do with how alert and sensitive you are about the currency volatility. Bollinger Bands is a wonderful tool that you can use to make better decisions in your trading. Use this tool the right way and you will surely reap big profits in your Forex trading.
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