One of the critical parts of forex education for any Forex trader is to understand the concept of standard price fluctuation and how to use volatility to their advantage.
If you understand the concept, you can easily apply it to Bollinger tapes, which are a major tool for all forex traders.
Let's look at why Bollinger groups are so useful and profitable when included in your Forex strategy.
If you don't know what a standard deviation is, just check out our concept article – okay, let's take a look at Bollinger's tapes.
Certain Bollinger groups
Bollinger ranges are simply bands of volatility made up of both sides at a moving average.
You calculate the Bollinger ranges using the standard deviation of the price over the same period as they move on average, then the volatility bands are applied above and below the moving average.
Moving averages are used to identify the underlying trend of currencies, and Bollinger strips do this by:
Combining the moving average of the currency with the volatility of the individual market (or standard deviation) – this creates an envelope for trading – with an average average price (moving average and 2 x tapes (expansion or contraction) on each side, reflecting volatility or standard diversion.
As prices diverge from the long-term average, the standard deviation rises – and thus the bands will fluctuate in different quantities, far from the average.
Why they work
In each market, the value of the traded currency tends to increase slowly in the long run.
Prices may jump quickly in the short term, but usually return to the longer-term moving average – which is fair value.
The standard deviation of the outer bands (how far they are from the average) indicates how far the prices are from the long-term value.
Most price spikes are caused by the psychology of the trader with greed and fear in the foreground, and this can be seen graphically with Bollinger groups.
So, how should you use Bollinger tapes?
There are 3 main ways to use them.
1. Noticeable price spikes
When the bars are far from average, you can use Bollinger tapes as a signal to win existing trades, or use them to identify nasty deals.
2. Enter existing trends
If you have a good trend in the forex markets, then you can use the downtrends to buy at fair value.
3. Introducing new trends
When prices are trading in a narrow range and start to break with volatility, a new trend can emerge.
Bollinger groups can certainly give you a new dimension to your Forex trading strategy, and any currency trading system can take advantage of the additional insights they can give you.
The word warning
Like all technical indicators, you do not have to use the Bollinger tapes in isolation to enter deals, as long as they are combined with time indicators such as Stohastic or RSI, then you have a powerful combination for higher currency profits.
In terms of forex education, knowing what a standard deviation is and how to apply the concept through Bollinger Bands will give you a huge trading advantage, so be sure to use them.