The journey of a new Forex trader is mostly about learning about different analytical instruments. On the way to achieving proficiency in the completed Forex industry, he has to add to his knowledge about these instruments continuously as they are his most powerful, useful tools. So, in your learning process, if you want to add a new weapon to your arsenal, following this article. We will discuss some basics about Bollinger Bands as we progress.
Bollinger Bands in Forex Trading
You cannot build a house without using a hammer. However, you cannot build it with just a hammer. A hammer has nothing to do with a screw or cement or any other instrument that are also necessary to build a house. Like that, you will need proper and effective to deal with a particular situation.
It is the name of an instrument that will help with add some more pips in your Forex trading account. It is kind of a technical indicator and mainly comes in handy while measuring a market’s current volatility and identifying oversold and overbought conditions.
Basically, this tiny instrument will tell a trader whether the current movement will end, or it will proceed vigorously.
When the movement becomes quiet, these bands get curtailed, and when the movement acquires more pace, they extend.
The lower and the upper bands estimate volatility, the prices’ volatility over time. As they estimate the market’s volatility, they automatically adjust to the changes in the market’s condition.
1. Different Kinds of Bollinger Bands
As the Forex market is a versatile one, and the market condition can take a variety of forms, all types of analyses come in several types. It doesn’t deviate from the norm for such belts. There are three parts of these belts to estimate volatility level of different market conditions.
- An Upper Belt,
- A Middle Line, and
- A Lower Belt
The middle stroke of the indicator programs normal condition to a 20-period. That is quite acceptable for most traders. However, one can experiment with several lengths of moving average when he gets fairly experienced implementing Bollinger Bands. At times, you need to increase the period to get smoother bands. For instance, those who buy bonds online often use the 30 period Bollinger band as it gives better dynamic support and resistance.
The lower and upper bands typically represent two default (Standard) deviations below and above the middle stroke.
The idea of standard deviation is just an estimation of how spread out different numbers are.
When the lower and upper belts are only one standard deviation (SD), it means that about 68% of the movement has emerged recently and are captivated within the boundary of these belts.
If the lower and upper belts are 2 SD it means that around 95% of the movement has emerged recently and are captivated within the boundary of those bands.
The higher the number of a standard deviation, the more rates those belts capture. A trader can easily try out various deviation for the belts once he becomes more knowledgeable with their work process.
2. The Bollinger Bounce
A special thing a trader needs to know about Bollinger bounds is that a trend tends to turn back to the middle of them.
That’s the core idea that brings about the Bollinger Bounce. When the Bollinger bands act like versatile resistance and support levels, these Bounces occur.
The longer the timeframe a trader is involved it, the more robust these bands become. Many traders over time and experience have developed particular systems that literally thrive on such bounces, this method is the best deployed when the movement is ranging, and no particular trend becomes clear.
A trader only wants to engage in this approach when the price is trendless. He should avoid such bounces when the bands are stretching.
Bollinger Bands may seem a little confusing at first. However, with practice and some effort, anyone can learn about them.