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Bollinger Bands

by: Cynthia Macy

Contracting bands warn that the market is about to trend: the bands first converge into a narrow neck, followed by a sharp price movement. The first breakout is often a false move, preceding a strong trend in the opposite direction.

A move that starts at one band normally carries through to the other, in a ranging market.

A move outside the band indicates that the trend is strong and likely to continue - unless price quickly reverses.

A trend that hugs one band signals that the trend is strong and likely to continue. Wait for divergence (when the price is flat or rising or falling, but the MACD is going in the opposite direction...the price will break out in the direction of the MACD) or a Momentum Indicator to signal the end of a trend.

I use the BB's for indication of when a breakout or breakdown is imminent. When the outside bands get very narrow, it means the price is consolidating and is getting ready for a breakout, either up or down.

At this point, it's dangerous to have a position because you don't know if it's going to break up or down. When the bands get very narrow, it's almost better to close out your old positions, even at a loss, until you see a clear direction. If you don't want to close out an old position at a loss, at least hedge it. See more about hedging later in the Advanced Day Trade Forex course.

The BB's can't tell you which direction the breakout will be, the Chaos Oscillator (MACD) and Momentum will do that, and I always trade in the direction the Momentum and Chaos (MACD) are going.

Sometimes when using the slower timeframes, I use the outer BB's as targets for my limit sell price. If the bands are really wide after a big move, I use the middle band as my limit target price.

Bollinger Bands are designed to capture the majority of price movement. When prices move beyond the upper or lower band, they are considered high (overbought) or low (oversold) on a relative basis.

More On Using Bollinger Bands:

First, the BB's can be used as I mentioned before, as price targets. If the bands are narrow, the price will be jumping up & down within the two outer bands. As mentioned before, this is not the best time to be putting on a trade,
as the trading range is too narrow, unless you can make a decent quick profit in a 1 or 5 minute chart.

If the range isn't too narrow, you can ride it up and down and book pips. I only attempt this in a 1 or 5 minute timeframe using the 5/9/18/50 EMA's. Don't do it if you can't make at least 5-10 pips up and down. The danger is in whipsaws.

Most of the time, unless the bands are too narrow, you can make trades by literally bouncing off the outer bands.

This is called "The Bollinger Bounce".

When placing a trade, just set your stop at the outer BB and your price target limit sell order where the other outer band is.

If your trade rapidly approaches the limit price and all your indicators say that the price movement is just getting started & not likely to quickly reverse on you, then you should first either remove your limit price & let the price run, or, raise your limit price another 5-10 pips. Then raise your stop to either your entry point or past it, to lock in either breakeven or some profit in case the price suddenly reverses on you.

This is definitely what you should do in a price breakout. If the price keeps going up in an extended breakout, you just keep adjusting your stop upwards to lock in more profit (this is called a trailing stop, more later on this subject) and keep raising your limit also.

A Super Advanced method of using BB's is to use two sets of BB's, both with the middle band set at 18. Set one BB to a standard deviation of 3 and leave the other standard deviation at 1. This gives you 6 short term support/resistance lines to work with. Your initial stop and target are the outer bands, and your inner bands are used for your trailing stop and short term resistance and
support. You can also trade off the two inner bands.

This method is very similar to using Fibonacci OR Average True Range (ATR), but is much easier to use and understand.

Pleave visit the author's other trading sites for more trading information:

http://www.daytrade-forex.com
http://www.daytradeforex.com
http://www.daytradeforex.com/products.htm
http://www.professionalforextrading.info
http://www.professionalforextradingonline.info
http://www.successtrading2000.com
http://www.successtrading2000.com/forex
http://www.tradecurrency.ca/education.htm
http://www.shortterminvestingsite.com

About the author:
Cynthia Macy has been trading various markets for over 12 years but now concentrates on the forex market. To learn more about forex trading, visit:

Request the 'Trade of the Week' to see actual trades using the trading methods and strategies.

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Forex: Benefits of Trading the Forex Market
by: Raul Lopez

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss come differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity.

Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market.

This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.

Leverage trading.

Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.

Low Transaction costs.

Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment.

The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading.

The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.

Trading from anywhere.

If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.

Some of the most important differences between the Forex market and other markets are explained below.

Forex market vs. Equity markets

Liquidity

FX market: Near two trillion dollars of daily volume.

Equity market: Around 200 billion on a daily basis.

Trading hours

FX market: 24hr market, 5.5 days a week.

Equity market: Monday through Friday from 8:30 EST to 5:00 EST.

Profit potential

FX market: In both, rising and falling markets.

Equity market: Most traders/investor profit only from rising markets.

Transaction costs

FX market: Commission free and tight spreads.

Equity market: High Commissions and transaction fees.

Buying power

FX market: Leverage up to 400:1.

Equity market: Leverage from 2:1 to 4:1.

Specialization

FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.)

Equity market: More than 40,000 stocks to choose from.

Forex market vs. Futures market

Liquidity

FX Market: Near two trillion dollars of daily volume.

Futures market: Around 400 billion dollars on a daily basis.

Transaction costs

FX market: Commission free and tight spreads.

Futures market: High commissions fees.

Margin

FX market: Fixed rate of margin on every position.

Futures market: Different levels of margin on overnight positions than day time positions.

Trade execution

FX market: Instantaneous execution.

Futures market: Inconsistent execution.

All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other market.

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