Knowledge of current economic events is a fundamental element of effective trading. In the case of currency pairs and indices, the ability to use the calendar is already satisfactory. Nevertheless, to assess market sentiment, it is worth following current events. In the case of instruments such as shares, tracking information from companies is a necessity.
Bollinger Bands Indicator
Type of Indicator
Bollinger Bands are a technical analysis tool consisting of three lines: a moving average (usually 20-period), and two standard deviations plotted above and below this moving average. It is a volatility indicator that measures the price variation over a specified period.
Purpose
The primary purposes of the Bollinger Bands indicator are to identify overbought and oversold conditions and to assess market volatility. Bollinger Bands help traders:
Determine potential reversal points,
Identify periods of low and high volatility,
Evaluate the strength and sustainability of price movements.
Calculation Method
The calculation of Bollinger Bands involves several steps:
Moving Average (MA):
Typically, a 20-period simple moving average (SMA) is used.
Standard Deviation (SD):
Calculate the standard deviation of the closing prices over the same period.
where CC is the closing price.
Upper and Lower Bands:
Upper Band: Upper Band = SMA + 2×SD
Lower Band: Lower Band = SMA − 2×SD
Trading Based on the Bollinger Bands Indicator
Bounces Off the Bands:
When the price approaches the upper band, it may indicate overbought conditions and a potential reversal downward. This is a signal to sell.
When the price approaches the lower band, it may indicate oversold conditions and…
