Operation Principle of the Technical Indicator Bollinger Bands
In his arsenal, every trader has his own method of analyzing financial assets, which can be based on any kind of analysis: technical or fundamental. However, the process automation causes an increased interest precisely in the first kind, thanks to which fix apitraders were searching for and continue to search for patterns in quotations movement. This allowed to create many trading strategies and approaches to forecast future value.
Today, you can count more than a hundred different technical elements that traders around the world apply. And if you take into account the various author’s developments, then this figure can be increased by tens, if not hundreds of thousands. At the same time, there are not so many of the classical types, since the principle is laid almost equally in the calculation of each technical indicator – the price parameter. That’s why some indicators repeat each other’s signals, although they do it differently.
The unique methods for indicator calculating can be Bollinger Bands – http://www.investopedia.com/terms/b/bollingerbands.asp. All its uniqueness lies in the fact that the basis for determining the technical signal is the standard deviation, and not the formula of the average price value. Standard deviation makes it clear how much the current value is overstated or understated in terms of volatility and the movement amplitude. That’s what makes it unique. For example, MA is based on the arithmetic mean calculation of price bars for n periods. Thus, the signal is only the actual position of the quotations. Bollinger Bands, in turn, demonstrates deviation that takes into account both the current and past state of the market, its volatility, and also forms a channel with a deviation of +/- 2, which allows you using these values in different types of fix apitrading.
Based on this, I will highlight the two most popular trading methods with this indicator:
- At the end of the border. The technique is concluded in opening trading operations when the quotes have approached the channel boundaries. The deviation in 2 indicates that in this zone the quotes have a strong resistance and support zone because quotes in this range have been repeatedly turned and did not deviate so much from the average value. Thus, the signal to the sales will be reaching the upper border of the channel with a short Stop loss level behind its border, and the signal for purchases will be reaching the lower limit with placing an exit order with the transaction also with short values. The goal is often the middle line Bollinger Bands or the opposite boundary.This trading robot operates by this principle – http://metatrader4expertadvisors.com/.
- Trade on the bases of channel expansion. This is a reverse view from the first which I myself use in my system to determine the entry in the position. The signal does not come from the indicator’slines, but rather from the fastening over them. I believe that fixing over the indicator lines is a signal to the formation of a new situation in the market and thus I enter the breakdown direction. It is worth noting that when this happens, the upper and lower limits expand – this indicates a new trend and entry into the position. The output is carried out when the indicator’s lines go into lateral normative motion. This is a sign that the movement is likely to end and you should expect a rollback or a trend continuation. But in this wave, I leave the transaction and fix the result.
Bollinger Bands is an excellent trend tool that can become a filter for any trading strategy. In turn, its automation allows you to more accurately study the current market situation and adjust your forecasts. It is the algorithmic approach that will allow you to maximize the potential of not only this indicator, but also of other technical elements.