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Chapter 35, Part III. Stop-Loss Orders Based on Volatility. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: The second indicator that we will talk about is Bollinger bands. This indicator directly links with volatility itself, that’s why we can say that it estimates upward and downward limits more strictly in statistical terms. We also have discussed already how it works and why it works.

    To correctly apply stop placement by Bollinger Bands you have to estimate two parameters – term of your position and the probability that you want to apply. Why is term is so important? The point is that Bollinger bands calculate volatility for the period that you’ve specified in its parameters. If you appoint 20 on a daily chart it means that indicator will calculate daily volatility based on the most recent 20 days. Second is probability. Depending on second parameter (1, 2 or 3 standard deviations) you can choose what probability to apply of your stop to stay untouched – ~66%, 95% or 99%. The greater probability you choose – the farther stop you will have to place and smaller lot you will be able to trade. Here is the same chart but with BB indicator (99% bands):

    Chart #2 | EUR/USD Daily

    In fact this indicator shows the range, where your stop-order should be placed. Suppose, that you intend to sell from 0.786 resistance at 1.4255, then, if you want that your stop should not been triggered with 99% probability you have to place it above 1.43 and then you can adjust it lower.

    Still, this indicator has an important problem. The point is that volatility is subject to change. In some periods it could decrease and BB will show tighter bands, while in some periods it could increase.

    #1 Sive Morten, Dec 28, 2013
    Lasted edited by : Oct 11, 2016
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