How To Multiply Your Forex Profits Exponentially With The Power of Bollinger bands

In the late 1980’s a man by the name of John Bollinger created a tool to measure volatility he called Bollinger bands.  Becoming a favorite among many, these bands provided a visual reference to price action relative to its mean.  Although simple in concept who would have ever thought so much insight could be gleaned from this incredible indicator. 

Three Important Bollinger Bands 

The  bands consist of a center graphing of a simple moving average (21 period), with the concomitant plotting of bands above and below representing two period standard deviations, which would represent the relative range trading has occurred. 

Classical statistical analysis cannot be applied to the closing prices of investments.  This results from the fact that individual foreign exchange closing prices, for example, do not follow stochastic distribution processes.  This is because foreign exchange prices are not normally distributed. 

The calculations in determining the standard deviations for foreign exchange prices can only be regarded as an uncertain estimate of a true standard deviation.  Because prices are constantly moving depending on volatility, they cannot be viewed as fixed parameters needed for classical statistical theory.  What Bollinger has done, nonetheless, is to offer a new technique to the investor to gauge volatility. 

Trading Signals via Bollinger Bands  

Some investors view the breaching of an upper or lower Bollinger band as a standalone trading signal in order to undertake a position.  As such, these events can be awarded inordinate significance.  Studies have shown penetration of Bollinger bands can occur up to 15% of the time. 

Not all of these events, however, are followed by a continuation of price movement in the direction of penetration.  Consequently, in order to improve performance in the trading of foreign exchange currencies, one would want to add additional confirmation signals before undertaking a position. 

Popular Bollinger Band Strategies for Forex 

Considering that most prices will fluctuate within Bollinger bands, many Forex traders buy when prices are near the lower range band and reverse their position when prices subsequently move to the moving average or higher.  

Bollinger bands can effectively be used especially in conjunction with other indicators to determine trend reversals, as well as entry and exit points.  One indicator that becomes extremely beneficial for trading foreign exchange with the use of Bollinger bands is the Relative Strength Indicator or RSI.  

Using Bollinger bands with RSI confirmation, one would short the currency if penetration of the upper Bollinger band occurs, while the Relative Strength Indicator is simultaneously showing weakness.  Under this circumstance, an investor would anticipate the price to fall and would exit upon reaching the lower Bollinger band or before.  

One would do the opposite, if the currency price went through the lower band, and yet the Relative Strength Indicator showed strength.  At this point, an investor would undertake a long position in the currency in anticipation of a minimum movement of back up to the moving average level. 

There is no absolute certainty in foreign exchange trading, but with the prudent use of tools such as Bollinger bands and the Relative Strength Indicator, any individual can greatly improve performance.

Hands down, Bollinger bands are the best indicator to trade with. Their use for buy and sell signals, is vast and extremely accurate. Visit our site for 6 free videos on how to master this incredible indicator. http://www.bollingerbandgenius.com

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Should You Use Bollinger Bands

From the onset, let me say that Bollinger Bands, developed in the early 1980’s by John Bollinger can be a very effective aid in your trading arsenal. I personally used them for years when I traded professionally, but have since slacked off using them in favor of a different methodology.  This does not mean, by any stretch of the imagination, that Bollinger Bands cannot be meaningful and helpful in your trading effort, and there are days when I am having trouble getting a read on the market action that I will add the Bollinger Bands for added insight into the days market action, especially if the price action is particularly ambiguous.

As I have drifted from theories centered around static volatility toward more dynamic volatility, specifically chaos theory and fractal formations, I gradually moved away from Bollinger Bands.  I would also point out that John Bollinger was one of the first to implement a system that incorporated dynamic volatility into technical trading with Bollinger bands.

Like most channels, the Bollinger band is based upon a specific time period (most people use 20 periods, but there are much shorter and longer variations on this system) and measure market movement by applying standard deviations, usually two standard deviations, from the intermediate trend.  Period closings above or below the two deviation channel indicate, essentially, an overbought or oversold condition in the market.  A careful look at a chart with Bollinger bands will indicate a high correlation between closes above or below the the band channel, or as it sometimes referred to, the Bollinger envelope, and a reversal in price action.

There is a modicum of mathematical knowledge required to calculate a basic standard deviation, though it is not really necessary anymore to do so as most trading programs have the Bollinger Band formula, along with specific parameters the user can set, built right into the chart.  With a simple click and a few selections of time periods you will have the Bollinger Band channel on your chart.  Most formulations of the Bollinger system use a simple moving average as the centerline on which to calculate the standard deviation range.  Though I have read several articles which propose using a different moving average formulation, some exponential, others proposing smoothing factors, to determine the intermediate center line on which the channel is based.

I advise everyone to pop a Bollinger Band channel on your chart from time to time and get a feel for this useful indicator.  One days when I am having a difficult time getting a feel for the market, I often add this indicator to gain greater insight into the days price action.

I write mainly about financial topics, specifically daytrading the emini contract, and many of my more technical

techniques can be found at my blog, The Fractal Futures

Trader.

I also write an ongoing commentary, which is a bit more opinionated, at The Fractal Traders Commentary

I encourage all to read the blogs and learn how to trade, as you can add $500-1000 dollars a day to your

pocket book. Best of trading to all.

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