If you want to make big profits from Forex you need to understand the concept of volatility and here we look at how to understand it and how to harness it for bigger Forex profits. To understand volatility you need to understand Standard deviation of price which may seem a bit confusing at first, but it’s totally logical and when you understand it, you will enhance your Forex trading profit potential.
Standard deviation gives an indication of the volatility of any price and that includes Forex prices; it measures how widely values (closing prices) are dispersed from the average price. Dispersion is the difference between the actual current price and the average value (mean closing price). The bigger the difference between the closing prices and the average price, the higher the standard deviation and volatility will of the currency pair will be. forex broker
Bollinger Bands – A Simple Visual View of Standard Deviation.
The Bollinger band consists of a centre band and two outer bands; the centre band is a 20-day simple moving average, the upper band is the 20-day simple moving average plus 2 standard deviations and the lower is a 20-day simple moving average less 2 standard deviations. When price volatility is low the bands are closer together, when volatility is high the bands expand and widen.
Why Bollinger Bands Work
In any market, the value of the instrument traded tends to rise slowly over the longer term. Prices may become volatile in the short term, but will normally come back to the longer term moving average (the centre band) The centre band represents “normal” value and a 20 day moving average is the average setting. The volatility of the outer bands shows how volatile prices are and how far away price is from “normal” value. forex broker
Bollinger bands are a key trading tool and can be used in the following scenarios
1. Spotting a New Trend
When a currency pair trades in a narrow range, the Bollinger bands will be narrow and close to the central moving average this shows a market with low volatility but low volatility never lasts for long and when prices break above or below the upper or lower band, a trend could be about to develop.
2. Timing Entry Levels in an Existing Trend
If you miss the start of a trend don’t worry you can simply look for a dip toward the centre band and enter in the direction of the trend. If you look at any strong trend, you will notice it dips back to the average middle band and you can then wait for momentum to turn up and enter a trading signal.
3. Market Turning points
When the price touch the top or bottom of the Bollinger band and momentum turns down, this is a an indication to take profits or look for a contrary a trading opportunity.
Bollinger bands and Momentum indicators
Bollinger Bands simply help you isolate the trading opportunity but you need confirmation of the trade and for this you need some momentum indicators to indicate the strength of price and two excellent visual indicators to use are the RSI and the stochastic.
Make Bigger Forex Profits
If you don’t understand Forex volatility, you won’t maximize Forex profits so learn about standard deviation of price and how to use the Bollinger Band and you will make bigger Forex profits and that’s what all traders want.
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