Bollinger Bands: What are they and how do we use them?
The idea behind Bollinger Bands is relatively straightforward: take a simple moving average and put an upper and lower trading band around it. The indicator uses the standard deviation of the trading instrument to determine the width between the SMA and the bands—borrowing a popular statistical tool based on the normal distribution for random variables.
It is critical to stress that the upper and lower bands are not considered “confidence intervals” in the way that a trader might expect. That is to say, there is no numerical justification behind expecting price to stay within the Bollinger bands any specific percentage of the time. This being said, price tends to stick within two standard deviations the vast majority of the time, and we can use this to our advantage.
Thus we will use standard inputs for the Bollinger band indicator to subsequently develop a simple strategy and test the results.
Generated using FXCM Strategy Trader
Forex Bollinger Band Reversal Strategy
Entry Rule: Wait until price falls below the lower Bollinger band or above the upper band. When price subsequently crosses back above the lower band and closes there, place a buy stop entry order at the last value for the lower band. When price crosses back below the upper band, place a sell stop entry order at the last value for the upper band.
Stop Loss: None
Take Profit: None
Exit Rule: The trade is taken out by the opposite signal. Thus if we are long due a cross above the lower band, a cross below the upper band would close the existing long position and establish a short position. The reverse is also true.
Read more at: Forex @ DailyFX - Forex Strategy Corner: Bollinger Bands Techniques for Trading http://www.dailyfx.com/forex/technical/article/forex_strategy_corner/2010/09/03/Forex_Strategy_Corner_Bollinger_Bands_Techniques_for_Trading.html#ixzz10N60Hxul
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