Forex Marketz Daily Forex News – Fully Markets Update
Ever wondered why the bollinger bands are so popular? Well, put simply, they tell an enormous amount in a small glance. Bollinger Bands were developed by the technical trader John Bollinger and you can read the investopedia writeup here. Let’s look at a nice chart with the bands:
In the above daily for the GBPUSD we see the bollinger bands in yellow. Notice that there are three parts to the band. By default, the Bollingers are based on a 20 point simple moving average. The middle line is the moving average over the 20 day period (on the daily) and the upper and lower lines are the calculation of 2 standard deviations from the center. Statistically, the likelihood of hitting the upper or lower bands is about 5%.
In a normal gently trending market these bands offer a reliable Support and Resistance for a trader. As the trades flow from the middle to the upper or lower section we can see a potential new trend emerging. Even if there are quick spikes in the market the bands will accomodate by widening or narrowing themselves to adjust support and resistance.
The one significant weakness of the bollinger bands is their inability to help with very strong trends in the market. For example, look at the timeframe July 15 – August 28. The pound was being pushed down strongly by the dollar. In that timeframe, the bands did not offer support or resistance information. Instead, we can simply look at the moving average alone for a shorter time and see the continuing strong trend.
