Forex Charts: Bollinger Bands
When you learn about technical analysis one of the tools that are often mentioned is Bollinger Bands. It is important that you know what Bollinger Bands are and how you can use them with forex charts. You should also consider whether or not this tool will work for your trading strategy and system.
What is a Bollinger Band?
The first point you need to consider is what a Bollinger Band is. A Bollinger Band is the use of a moving average to create two trading bands. The trading bands will be above and below the moving average. The Bollinger Bands got their name from their creator John Bollinger who first used this tool in the 1980s.
Bollinger Bands actually work on a very simple calculation when compared to the percentage calculations of a normal moving average. The Bollinger Band uses a standard deviation calculation and subtracts or adds to it. This calculation is used to measure price volatility. One of the best points about Bollinger Bands is that they move with the market conditions so you have an up to date measurement.
Using Bollinger Bands on Forex Charts
It is easy to place Bollinger Bands onto your forex charts. Most charting software will come with Bollinger Bands as a tool that can be placed on the charts. All you need to do is provide certain pieces of information. The information you need to provide will vary depending on the charting software you are using. Some software simply needs you to select the Bollinger Band option and it automatically fits it to the charts you are looking at.
Using Bollinger Bands to Trade
When you trade you need to know what to look for with Bollinger Bands. When market prices run along the central line of the Bollinger Bands the market is ranging and you should trade according to this. However, when the top and bottom bands of the tool are being touched you need to take note.
When the price range constantly touched the upper Bollinger Band the currency pair is thought to be overbought. When the lower band is constantly touched then the currency pair is thought to be oversold. At both these times it is likely that the currency will reverse. It is hard to determine how fast the reversal will come and how heavy the swing will be when you use Bollinger Bands.
The Risks of Bollinger Bands
It is important that you understand the risks of using any technical indicators including Bollinger Bands. The biggest risk with these tools is that the forex market is hard to predict. The currency pair price could be hitting the lower band repeatedly, but there may not be a reversal for a long time. It is important that you combine the Bollinger Bands with other technical indicators and market insight.
The other risk with Bollinger Bands is that they are a lagging indicator. This means that the information you are getting from the tool is all historical. There are also times when the information is slow and a turn has already happened. At these times you could lose the edge on a trade and make less profit from it. It is recommended that you combine lagging indicators with leading indicators to get the best view of the market.