This forex trading tutorial will discuss Bollinger Bands, Formula For Bollinger Bands, Description Of Bollinger Bands, How To Use Bollinger Bands, Disadvantages Of Bollinger Bands, Characteristics of Bollinger Bands Indicatoráby John Bollinger
The bands of Bollinger (the Bollinger Bands, sometimes there is a transcription "Bollinger") - can be defined as an indicator, similar to moving average envelopes, but based on the current volatility in the market. Unlike the envelopes of moving averages, the Bollinger bands vary not only depending on the direction of the price movement, but also on the nature of this movement (the speed of the price movement).
Bollinger bands provide a statistical assessment of how far short-term traffic can go before it returns to the mainstream.
A measure of volatility in the Bollinger bands is the mean-square deviation (SDE), which in the Western literature is called the Standard Deviation term.
The indicator consists of three bands:
Central band - is a moving average, which can be simple, weighted, exponential or sliding of another type.
The upper band is the moving average + (coefficient x RMS)
The lower bar represents the moving average - (coefficient x RMS)
The standard deviation (Standard deviation) is calculated by the formula:
where P is the price of the asset, N is the number of periods for the calculation.
Bollinger bands are formed by three moving averages. In the Bollinger indicator, the distance of the bands from the center line depends on the behavior of the prices. Corridors of the Bollinger indicator strip are called standard deviation corridors, respectively, the bandwidth is proportional to the standard deviation of the price value from the given order of the moving average for the time period under study.
The distance between the bands is determined by the standard deviation of prices, the bands expand when price volatility increases and narrows down when their volatility decreases. If the band narrows, then we see a lateral movement of the market. If the band expands, then we have a directed movement of the market up or down - that is, a trend. On the position of the middle line relative to the price, we make a conclusion about the direction of the market.
Analysis of graphs using the standard deviation corridor of John Bollinger is an independent and original method that allows you to assess the volatility of the market, as well as determine the beginning of strong movements in the market. In combination with other analysis tools, the indicator gives the trader an opportunity to use a wide range of trading strategies.
John Bollinger recommends using a coefficient for the RMS of 2.
The most recognized and common are the following trading methods for the Bollinger Bands :
From the shortcomings of the Bollinger bands, one can distinguish high subjectivity, an insufficient sampling of data when tuning to the recommended orders of means, which underestimates the statistical significance of the data, and at high orders, the sensitivity of the indicator is lost. The author of the method points out the possible inapplicability of the bands in illiquid markets and markets with low activity.
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