Moving Averages & Bollinger Bands. Helpful Info to Be Aware of


Discover forex Magic Machine. Moving averages (MAs) are a very popular tool used by currency traders. They are a lagging indicator of the price action and short and long term trends are easier to identify using moving averages. Read about L.M.T Forex Formula.

MAs are calculated on the trader’s specifications. They can be formatted to different style of trading and time frames. For example, in case you want to use a 90 time frame moving average, the prices of the last 90 times frames is added together and divided by 90.

A moving average can be calculated based on the opening, high, low or closing price within a time frame. Since the closing price is the most important price, most traders prefer to use the closing price. There are three types of moving averages. First one is the Simple Moving Average. Second is Weighted Moving Average and the third is the exponential moving average.

The simple moving average as the name suggests is simply calculated by dividing the price in each time frame by the number of time frames. A weighted moving average gives more weight to the current prices as compared to the prices in the last few time frames. In an exponentially smoothed moving average, the chart is calculated gradually with less emphasis on the prices in the latter time frames. Exponential moving averages are smoother as compared to the simple.

What are Bollinger Bands? Bollinger bands are plotted at a standard deviation above and below a moving average. The base of a band is moving average and the bands width is determined by volatility. Since standard deviation is a measure of volatility, the bands are self adjusting. Widening during volatile markets and contracting during calmer periods. The bands bracket almost 90% of the market action.

Bollinger bands have the following characteristics. They are curves drawn in and around the price structure. This provides relative definitions of high and low. Knowing when the prices are high and low, a trader can make rational investment decisions by comparing price action with the action of other indicators.

Bollinger bands can be applied to mutual funds, forex trading, futures, indices and most other types of trading. Sharp price action tends to occur as the bands tighten and as volatility lessens. A continuation of current trend is implied when the price moves outside the bands.

Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for the reversal of the trend. A move that originates at one band tends to go all the way to the other band.

When the bands are flat and narrow, this indicates that price volatility is lower than in previous time periods. The 10% price action outside the bands is most likely going to approximate areas where prices will return to within the bands.

Wide bands are an indication of a very strong move. When the bands begin to flare this indicates increased volatility and start of a new strong directional or trend move.

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Categories : Technical Analysis