Bollinger bands

 

Bollinger bands is a technical analysis tool
that helps measure volatility, and are made up
of two lines moving around an exponential
moving average. The lines above and below
the EMA form the Bollinger bands and are
designed so that 95% of prices fall within the
bands. The bands widen when market volatility
increases and narrow when it decreases.
This is a useful feature because if the average
price move is 50 pips in a quiet market and
expands to 100 pips in a volatile market, you
will need to adjust your trading to account for
these bigger moves. The price that you choose
to enter the market will move further away from
the market in volatile times, giving a better
entry that is adjusted to the current situation
rather than past activity. Furthermore,during
times of high volatility when bands are wide,
you will need to place your stop loss further
away from your entry point. The opposite is
true for times of low volatility where the bands
are narrow, and the stop loss may be placed
closer to the entry point. Remember, as
always, the Bollinger bands are best used in
combination with other indicators to avoid
false signals.
Bollinger bands work well in both ranging and
trending markets. In ranging markets, they may
forecast reversals, as prices are likely to bounce
off the upper and lower bands. In trending
markets, after we identify the trend direction
on the daily chart, we can look to sell when the
price touches the upper Bollinger Band if the
market is in a downtrend, and look to buy when
the price touches the lower Bollinger Band if
the market is in an uptrend.

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