How to Measure Forex Trends with Bollinger Bands
Have you ever used the Bollinger Bands indicator? Yes, an indicator with three lines following the price movement with a certain formula. Bollinger Bands is one of the most popular technical indicators for traders in the forex market. Many traders use Bollinger Bands to determine overbought and oversold levels, make a sell when the price touches the Upper Band and buy when the price touches the Bottom Band.
In a market that moves within a sideways range, this technique performs well, as prices go up between two bands like a tennis ball that bounces off the wall of a tennis game. However, this indicator does not always provide accurate buy and sell signals.
According to the inventor of this indicator, John Bollinger, said the band, not a signal but only a limit. Top Band does not mean the sell signal and the bottom Band is not a buy signal. Because the price often also moves in the band. Most traders do do the above. Sell in Band Atas, Buy in Band Bottom. This gives bad impact, often exposed to stops or even worse.
Perhaps a more useful way to trade with Bollinger Bands is to use them to measure trends.
One of the cliché opinions in trading is that prices move within a range of 80% of the time and price movements reflect the consolidation of bullish and bearish battles for supremacy. The trends referred to by John Bollinger are rare, because that’s why trading in trends is not easy. The definition of a trend becomes a deviation from the norm (range).
Bollinger Band’s formulation is:
BALL = Top Band
BOLB = Band Down
n = Period MA
m = number of Standard Deviations (SD)
SD = Standard Deviation = (HI + LO + CL) / 3
BOLA = MA (n) + m * SD [TP, n]
BOLB = MA (n) – m * SD [TP, n]
In essence, the Bollinger Band sees or calculates the deviation (deviation). This will be very meaningful by setting up 2 Bollinger Bands. One using deviation 1 and the other using deviation 2.
The Buy area is between the Upper Band (SD 1) and Band Atas (SD 2). While the Sell area is between the Band Bottom (SD 1) and Band Down (SD 2). Trading signals appear when (one) of the area away from the middle or average MA.