Bollinger Bands Explained - How to Make Profit from It

Published: 17th August 2009
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As currency traders, we depend on foreign exchange markets volatility as a method to make pips and profits. We are able to only earn a profit when the currency pair's price changes and moves up and down. If the price does not change, there are no pips or profits to be made. When the market produces a consistent, repeatable move up or down, we wish to make pips from that change in the price level. The more the price changes, the more pips you make.

Bollinger Bands Explained

Volatility is the relative rate that the cost of a currency pair moves up and down in the market. In simple terms, it is the amount of price change measure over time. If the currency pair price moves up and down rapidly over a short period of time, the foreign exchange market is showing high volatility. On the other hand, if the price does not move much over a period of time, the markets are showing lower volatility.

you must know as a currency exchange trader that Forex markets are either ranging or trending. Markets are usually ranging 70% of the time. The bulls and bears are in unceasing battle in a range bound situation. Like a long rally in a tennis match, price action is back and forth, back and forth. Neither side is winning the battle.

When range bound, the market established a fairly consistent level of volatility. We want to know where the market will reverse from up or down. Suddenly volatility increases and the market deviates from its range bound condition. When such a break occurs we would like to have a{n alert|n early warning| caution that the move above and below the recent range is a major deviation from the norm.

Bollinger Bands Explained

Bollinger bands guess the probable high and low price of a currency pair based mostly on market's fresh level of volatility. The bands are drawn at an equal distance above and below a straightforward moving average.

The stronger the bands are, the longer the time frame you are in. These bands act as mini support and resistance levels ( S&R ). Think about Bollinger bands as an envelope indicator that is projecting top and bottom lines around price .

In a range bound market, the bands are almost parallel. Bollinger Bands expand, open up and move in the other direction when the market becomes more volatile. Bollinger bands are self adjusting. The bands respond by contracting and becoming closer together when the market moves into tighter costs.

John Bollinger was a famous technician of the markets in his days. Bollinger Bands were first introduced by John Bollinger in 1960s. There are 3 ways you can use Bollinger Bands in your trading. These are : one ) Range Trading. 2 ) Breakout Trading. Three ) Tunnel Trading. You need to now read Part II of the Bollinger Band article.

In its simple form, Bollinger bands measures volatility in price action and signals to a trader points in time where price is highly certain to continue or reverse direction. When you get into the details regarding Bollinger bands it's a little funny as the set-up for the reversal and the continuation are nearly matching. YES it's correct. They assert when Bollinger bands closes outside of a 2.0 standard deviation higher or lower band a reversal is likely because price will spend 99% of its time inside the bands, so when we get a close outside a band we've got a high likelihood of a reversal.

This is true, however the strongest positions I've ever entered that moved the quickest did exactly the opposite. Let me tell you what I mean. You see in order to read Bollinger bands like a seasoned pro, in fact BETTER than a seasoned pro. You have to pay attention to what the bands themselves are doing as price shall we say'exits' the bands.

that is when price closes below the lower band, and you are eagerly anticipating taking a long position, stop for a 2nd and take a look at how BOTH bands are responding to approaching price action to the lower band. As price approaches the lower band what's the lower band doing? At the same point in time what is the higher band doing?, because if they're both turning outward and have the look of extreme growth, then there's a really high chance that a reversal is out!

There are a couple things to pay attention to. As the bands expand this indicates expanding volatility. If price has closed lower and closed below the lower band and as explained above, both bands are turning and opposing one another ( I sometimes refer to this as heading North and South. ) then what has happened is price is going to continue to fall for a period.

be aware that there is often a'head fake' that occurs in this set-up where price does exactly as shown here and then takes off in the other direction. Your stop and entry are key.

Bollinger bands measures volatility which is more predictive than price itself. A information understanding of a way to use Bollinger bands is a profitable venture, do not even hesitate!

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