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Chapter 12, Part I. Bollinger Bands. Page 4

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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    Commander in Pips: Come on, think yourself, if it was so simple – everybody was a billionaire already. The detailed answer as follows – how it works in general (here is our “further clarification”):

    1. The most recent point of the BB indicator in time and its bands shows the range, based on historical deviation that has been calculated based on last “N” candles, which you’ve specified as a MA parameter.

    2. When the new bar has appeared – the most distant bar is eliminated from the calculation and replaced by the most recent bar. Due to this, the value of deviation changes, and it also makes the distance between bands change. The same as with any Moving Average calculation.

    3. In general – if future price volatility will be less than those that has taken part in current calculation of deviations – then the market will stand inside the bands range. If it will be greater – then range will become wider. But you do not know ahead of time – will it be so, or not.

    That’s why it is not so simple – to say that market should bounce to the downside, when it touches the band.


    Pipruit: I see. But why we need this indicator at all, then, if volatility is changing over time, and we can’t be sure – will price bounce from the band or not?​
    Commander in Pips: Reasonable question. I want to cheer up you a bit. First, the market very often stands in the range or does not show really impressive thrusts – very often it moves so-so. Although bands fluctuate all the time – the volatility does not change drastically, and BB becomes and excellent indicator – its bands hold price action very well. Even when this harmony suddenly breaks – it tells you something different, because it takes shape in bands behavior.

    The second answer you know already – never rely on any single tool. Any indicator should be used only as addition to an overall strategy, but not as an overall strategy itself.
    Pipruit: Ok, I think that I catch it. Although, I do not understand your crabbed basis, why it works at all, but I understand the major point. BB was built on probability theory and based on some math law – price objectively couldn’t deviate for more than 2-3 standard deviations of price action during the period that we’ve specified in BB tunings menu if volatility of the market will not become greater.​
    Commander in Pips: Well, this is quite enough – nice explanation.
    Pipruit: So, how we could use it?​
     
    Hamza Samiullah and fran alvarez like this.
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