Forex Trading Daily Forecast EUR/USD

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Bollinger bands - Indicator

Bollinger-band

Bollinger band trends is a trend  indicator which shows two things  -  the direction and the volatility of currency pairs. The indicator consists of  two bollinger bands, from the lower and the upper side of a moving average. Bollinger bands are based on standard  on  a 20-bar moving average.

Standard deviation is a statistical term that measures the deviation in the case of different prices at closing in relation to the average price at closing. The upper part is  based on two standard deviations above the 20-period moving average, the lower one is based on  two standard deviations below 20-period moving average.

Hence it follows that 20 period bollinger band shows to traders how volatile was the closing price over the last 20 periods. In case of big volatility top and bottom line will be widened. When the prices remain stable in a narrow Range, the lines will be narrower.

Bollinger bands signals 

Bollinger bands provide useful signals about the price movement after a period of consolidation.

Signals for opening position - when the two lines begin to diverge from each other after a period of consolidation it is considered as a signal for the market to start enteing in the direction in which the price is made in the divergence of the lines.

Signals to close the position - at some point after the divergence both lines will follow their approach and will meet again. When this happens, most traders put trailing stop to close the position at reversing the trend.

Advantages of bollinger bands:

 

- Helps to identify the trend.

- Help to identify the volatility of the market.

 

Disadvantages of bollinger bands:

- Follow the market price with some delay. The data in the calculation reflex past period  which is not guaranteed indicator of what may happen in the future. 

The two lines do not represent levels of support and resistance, contrary to popular belief.

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