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Chapter 19, Part III. Ranging Market by Indicators. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Bollinger Bands

    Pipruit: I do not quite understand all the stuff that you’ve explained about standard deviations and normal distributions, so my foundation is what you’ve told about trending market. Since ranging market is opposite to trending one, hence, our thoughts here have to be opposite also.​


    Chart #2 | 5-min EUR/USD and Bollinger Bands (20)
    [​IMG]

    Pipruit: I use red lines for 1 standard deviation, while blue lines for two standard deviations. Since, you’ve said that during trending environment market should mostly be between these lines, then, during ranging behavior, it should stand in the middle – inside red lines, right?​

    Commander in Pips: And what will you answer if I say that both MAs have the same period…

    Pipruit: As I’ve said, I do not quite know it.
    Commander in Pips: Ok let me just make small theoretical add-on to your purely practical thoughts. In fact the width of the lines shows volatility – average deviation of price from its average. The red lines show a single standard deviation on both directions, blue lines show two deviations. When the market turns to ranging, the overall trading range contracts, hence, the deviation from average price is also contracting. That’s why the bands narrow and converge to each other.

    Second, the red lines show interval where price should stand with a probability of 68% - just a range of 1 standard deviation. AS market stands there it tells that volatility decreases significantly and the market in contraction mode. In other words – it’s ranging and it tells us that there hardly will be strong move in any direction. However, if bands start to expand telling us that volatility increases, it cautions us about a probable trend starting.

    Pipruit: So, we can say, that in general, a ranging environment will be on the road with width decreasing between the bands and mostly in the horizon direction. Simultaneously price will stand in some horizontal range also, right?​
     
    #1 Sive Morten, Dec 21, 2013
    Lasted edited by : Apr 19, 2016
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