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Chapter 12, Part I. Bollinger Bands. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 19, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Bollinger Bands


    In the beginning of our discussion I want to give you the link: www.bollingerbands.com. We will not talk about formulas of Bollinger Bands (let’s call it BB), history of its creation, about Mr. Bollinger himself, etc. We will discuss only those parts that are really necessary for us – the practical application of this indicator. But the link will allow you to learn more, if you will wish that.


    Description of BB Indicator


    In general, BB consists of three lines – some MA in the middle, and two bands – an upper band and a lower band. The determinative parameter for BB is the period/type of MA, because bands are derivative lines from the MA parameter. The major value for trading of this indicator is in bands. If you are familiar a bit with probability theory and normal distribution – you will easily understand it, if not… Ok, I’ll try to explain it simply. Normal distribution suggests, that some variable – in our case this is price, will stay in a range of two standard deviations with a probability ~95%, in range of three standard deviations with a probability more than 99%. And this should happen during the period, based on which this standard deviation has been calculated.


    Pipruit: What?​
    Commander in Pips: Ok, ok, I’ve got it… Look, let’s talk about parameters of BB indicator:

    1. MA – period, its type and type of price – close, high, low, etc. That is what we’ve talked about in previous chapters, nothing is new here – the same parameters as for any MA;

    2. Number of standard deviations. The greater this parameter – the wider band lines, and the less probable that market will touch it. In most cases there is not much sense to apply more than 3 standard deviations.

    You will not have to calculate any probabilities, standard deviations itself and other stuff. Just keep in mind, that applying 2 deviations tells that price action will be inside the bands with probability 95%, 3 standard deviations – 99%. So, market will touch the bands very rarely.
     
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