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"Forex trading can involve the risk of loss beyond your initial deposit. It is not suitable for all investors and you should make sure you understand the risks involved; seeking independent advice if necessary"

Binary Options

Tuesday, January 8, 2008

Bollinger bands

Bollinger Bands

The Bollinger band developed by John Bollinger uses moving averages with 2 trading bands, similar to envelopes on either side of a moving average. Bollinger bands add and subtract a standard deviation calculation that measures the volatility of price ensuring that at least 80% of price is contained inside the bands

These bands are represented on the charts by a center line (Exponential moving average) with an upper and lower band. The bands expand and contract as volatility increases and decreases. Bollinger bands tell us when the market is quiet (ranging) or active (Trending) When the market is quiet and ranging the bands contract to form a channel and price ranges up and down inside the channel. When the market is active or trending the bands widen and spread apart.

The Bollinger Bounce

With Bollinger Bands price tends bounce off the upper and lower lines then return to the middle line. When the market is ranging these mini support and resistance line can be very effective lines to trade off.

The next chart shows how price can bounce off the different bands, each creating new trading opportunities. When the market is ranging the bands are contracted forming a channel. Sometimes the market can range for extended periods and the rule is that the longer the ranging period the stronger these bands tend to be.

As the market is not always trending these ranging periods can offer many trading opportunities.

Bollinger Squeeze
When the Bollinger Bands squeeze together during a period of consolidation this is normally the precursor to a breakout. If a candle penetrates the upper or lower band and the Bollinger bands begin to expand then this could well be the start of a new trend.

When a candle penetrates the upper band then the move is likely to be long. When a candle penetrates the lower band the next move is likely to be short.

Because 80% of the price action in a Bollinger Band is contained within the top and bottom band, when a break out occurs and the bands widen it normally signifies the start of a new trend. As long as the candles pierce or remain above the top line or below the bottom line we stay in the trade until such time as the candles open inside the outer lines of the Bollinger Band.

The next 15 min Eur/Usd chart shows a typical Bollinger Squeeze and Breakout trade. This strategy is designed for you to catch a move as early as possible. Setups like these don’t occur everyday, but you can probably spot them a few times a week on a 15min chart.

Standard Bollinger bands generally use a 20 period setting with 2 standard deviations. As with most trading indicators these settings can be changed to any period that is suitable for the individual trader.

The following 1hr GBP/USD chart has a period setting of 50 with a deviation of 2. As we can see the high lited areas show many trading opportunities where price has stopped short and reversed on the Bollingr lines. We can Identify both the Bollinger Bounce and Squeeze.

You will notice too that once price closed inside the lower line it returned to the middle line before continuing short again.

Click on charts to expand

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