When you start to try and learn how to trade Forex, there seems to be a multitude of indicators, expert advisors that can help you in your trading, and two of these indicators are Moving Averages and Bollinger Bands. In this article we will discuss both of them.
The MA indicator is one of the oldest and most often used indicators in technical analysis. The 5 day moving average is got by adding closing prices for the last 5 days and dividing by 5. All the other moving averages are calculated the same way and we use them because it smoothes out the price fluctuation and means it eliminates the noises and makes the chart clearer for trading. If you add a 5 day MA to your chart you will notice that it would hug the price action more closely than a 40 day moving average. Shorter term moving averages are more influenced by everyday shifts.
You do get different types of Moving Averages:
• Simple moving averages provide the same weight to all the prices.
• Triangular averages provide more weight to prices in the middle of the time period.
• Exponential and weighted averages provide more weight to recent prices.
So what else can a MA show you apart from showing you the current trend? The 200 and 365 EMA can be very effective support/resistance lines, if you add them to your charts you should notice how price will react to them, and on many occasions price will bounce of the line.
What you have to remember is that a moving average does not predict price but show you the current direction of price based on the past prices. Adding Moving averages to your charts can help you confirm existing trends, identify new trends and identify trends that are coming to an end before a market correction.
Bollinger Bands are another technical analysis tool that you can add to your arsenal to help you trade in Forex in a more effective manner. They were first invented in the 1980’s by John Bollinger and today you will find them as an option in most of the analytical software and charting platforms currently in use today, including MetaTrader. So what do band actually show us.
Bollinger Bands are used to measure the highness or lowness of the price relative to previous trades. When you actually add the Bands to any of your charts you will see 3 lines. The middle line is just a simple moving average, and the upper and lower lines are determined by volatility, which is typically the standard deviation of the same data that was used to get the simple moving average. The Simple Moving Average usually has the value of 20.
The gap between the line varies and can indicate the volatility of the currency pair. When they are far apart this indicates volatility, and when the bands have only a slight slope and lie approximately parallel for an extended time the currency pair will be found to move up and down between the bands as if they are moving through a channel.
One thing you should notice when you add Bolinger Bands to your chart, is that price will usually react at either the upper or lower band and return to the middle, this is called the “Bollinger Bounce” and some traders do use this in their trading. Generally it is a better indicator in the larger time frames, and with all indicators, cannot be used on its own to trade.
As with all other technical indicators Moving Averages and Bollinger Bands should not be used by themselves but should be combined with other indicators / studies such as candlestick patterns to make a complete forex trading system.
Author Resource:-
Gavin Dye is currently trying to make money trading in the Forex Markets, wathc how he gets on a http://www.watchmelearnforex.com
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