Forex trading has become one of the most looked after occupation for many persons around the world. This is due to its great advantages over other capital markets and its high potential profitability; among these advantages we can find its extremely easy accessibility thanks to the internet and its high liquidity and high leverage.
But in forex as in all other speculative activities in the capital markets there is a major problem new and experienced traders will face every time they open their forex trading stations. This is how to predict the behavior of the forex market over time in order to make the highest amount of profits and with the less risk possible.
One of the techniques used to predict forex market behavior is that based on Bollinger Bands.
These Bollinger Bands are what is called a technical trading tool used in the capital markets (including Forex) created by John Bollinger in the early 1980s. These technique was formulated based on the need for adaptive trading bands and the discovery that the volatility of the markets was a dynamic phenomena, not a static one as was widely believed at the time.
The first thing you should notice about Bollinger Bands is that they consist of a set of three curves drawn in a forex chart in relation to the currency prices. The middle band in the forex chart represents the intermediate-term trend, and it is usually a simple moving average, that serves as the reference base for the upper and lower bands. The interval separating the upper and lower bands from the middle band is calculated by using the volatility of the market; typically the standard deviation of the same data that were used for the average.
The default parameters used with these analysis technique is 20 periods for the average and two standard deviations for the gap between the bands. These parameters may be adjusted to suit your particular trading purposes.
In a future article I will talk about how these bands will give you a very good prediction on what the market will do next, based on the parameters and statistics built in the Bollinger Bands.