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Hello Baron,
Welcome to our sixth entry on the basis of trading forex. In this email we´ll be learning about: Bollinger bands
Bollinger Bands
A technical analysis indicator, the Bollinger bands were invented by John Bollinger in the 1980s. Their concept has evolved from trading bands, to measurement tool to determine the highness or lowness of the price in relation to precious trades.
Bollinger bands consist of three elements: - Middle band being N-period- simple moving average
- Upper band at K times and N period- standard deviation above the middle band.
- Lower band at K times and N period standard deviation below the middle band.
Common values for N and K are 20 and 2, respectively. The set choice for the average is a simple moving average, but other averages can be used if needed. Exponential moving averages are usually a second choice. Commonly traders use the same average for middle band and standard deviation calculation.
Uses
Bollinger bands provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. Their pattern gives a rigorous pattern recognition and it´s good when comparing price action to indicators action to come out with a systematic trading decision.
Interpretation
The use of the Bollinger Bands varies among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Options traders often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock-technical analysis.
Effectiveness
Recent study had concluded Bollinger Band trading strategies may be effective with the Chinese marketplace:
The percentage of the data outside the Bollinger Bands will always be limited to a certain amount. So, instead of finding about 95% of the data inside the bands, as would be the expectation with the default parameters if the data were normally distributed, one will typically find less; how much less is a function of the security's volatility. Baron We hope this information was useful.
Tomorrow you´ll receive information on: Expert advisor (EA) |
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