Chapter 19, Part II. Indicators’ Application for Estimating of Trending Market. Page 3

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

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1. Sive Morten Special Consultant to the FPA

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Commander in Pips: Next is Bollinger Bands, but I personally do not like very much using this indicator for estimation of trending market. Still there is solid logic for its application for that purpose. Bollinger Bands What do you remember about BB?

Pipruit: Well, I remember that there is some kind of statistical foundation of its work, something with normal distribution law…

Commander in Pips: Right. Although there is a question, is FX price normally distributed or not? We will not dive in this swamp currently, but focus on the logic of using BB for indication of a trend. As we’ve said previously, a good trend is a relatively rare event and most of the time the market spends in some range. In general, market ranging is 70-80% of time or even greater. So, ranging is a normal condition for prices.

Now let’s take a look at chart #4. What normal distribution tells us - 68% of the time the market should spend between bands of BB that use 1 standard deviation. That is the green bands on the chart. 95% of the time the market should stay between red lines that are 2 standard deviations from average price. Hence, when the market stands between the green bands – there is no trend, because the market does not come out even from 1 deviation from average price, and as we’ve said this is a normal ranging environment.

When market suddenly explodes and moves in the range between green and red lower bands, then we can suggest that probably a downtrend has started, because th market holds in a non-typical range.

Pipruit: And why this range is non-typical?

Commander in Pips: Because the probability is that market could stand here is just 13.5%: (95-68)/2 = 13.5%. So, what do we get? The market stands in the range (between the bands), where it could stay only with a low probability, but it still stands here. That could happen only when the market environment is changing.