Download this Forex Swing Trading End of Day Trading Kit FREE! This FOREX PROFIT ACCELERATOR FOREX-4 PACK Training kit has got 100+ page PDF plus videos that you won’t find anywhere else. Get these Forex Scalping Cheatsheets FREE. Learn thise powerful Fibonacci Retracement method FREE that pulls in 500+ pips per trade! Bollinger bands are an effective technical analysis tool that is used to measure the volatility in the market. So what are Bollinger Bands? Bollinger bands are bands plotted above and below a moving average. The recommended moving average is the 20 period average that is an effective representation of the intermediate trend.
Bollinger bands may be applied to any market or security. Any timeframes from daily, weekly, monthly to intraday can be used. Primary advantage of using these bands is to check if the prices are relatively low or high
Bands will be narrow when the volatility in the market is low. These bands expand when the volatility in the market increases. This information can be especially useful to options traders as options prices are heavily influenced by the swings in volatility.
When prices move above the upper band this is a sign of great strength and when they move below the lower band, a sign of great weakness. When prices move outside the bands, trend continuation is often a valid assumption.
Rapid and substantial price moves often tend to happen after the band tightens. Bollinger bands are often used in conjunction with other technical indicators to detect high probability trend reversal or turning points. The primary indicator that works best with these bands is the RSI (Relative Strength Index), MACD or the CCI ( Commodity Channel Index).
The bands that are plotted above and below this moving average are the moving standard deviations. These bands vary in distance from the average as a function of market volatility. Two standard deviations above and below the average is the recommended settings for these bands.
However, if the number of periods in the moving average is increased to 50 for longer term trends, the recommended setting for the bands should be increased to two and half standard deviations. Similarly, if the moving average period is lowered to 10, the standard deviation should be decreased to one and a half.
For the stock market as well as individual stocks, 20 period moving averages are the best. However, the average that is selected should be descriptive of the timeframe chosen. Trading bands is one of the most powerful concept available to a trader.
However, when prices touch these bands, it should never be taken as an absolute signal. It should only be taken on a relative basis and the price action needs to be confirmed with other technical indicators before trading on these signals.