Most FX traders probably use Bollinger Bands for investing. We will explain the statistical movements, trading timing, and how to use it. This is because Bollinger Bands make it easier to understand whether a trend is occurring or not. However, be careful as the contrarian strategy using Bollinger Bands is not very effective.
What are Bollinger Bands?
The indicator invented by financial analyst John Bollinger is called Bollinger Bands. Centering on the moving average line, the rise and fall of the price is determined by displaying the standard deviation calculated using statistics. In the example below, the yellow line is the 20-day moving average line, and the lines at the top and bottom of the chart indicate the standard deviation. If it goes below this standard deviation, it signals a downtrend, and if it goes above it, it signals an uptrend. It is an indicator that allows you to analyze whether there is a trend and find out the fluctuation range and risk of the moving average.
Source : AUD/JPY 1hour leg 01-08-2023 Tradingview
What is standard deviation?
Standard deviation is a numerical value calculated by how much variation there is from the average value of data for a certain period of time. The higher the standard deviation number, the higher the volatility. σ is used as the unit of standard deviation. σ can often be set in three stages.
- Probability of falling within ±1σ: 68.2%
- Probability of falling within ±2σ: 95.4%
- Probability of falling within ±3σ: 99.7%
Actual settings are often set to ±3σ. If you read the explanation of Bollinger Bands, you will find the above explanation, but many people who actually trade think that the probability of falling within ±3σ is 99.7%, which is not true. And it is right.
Probability of falling within ±3σ
It is said that the probability of falling within ±3σ is over 99%, but those who actually trade would think that this is not the case. There is a possibility that the candlestick will fall within ±3σ, but in reality it often extends beyond normal. The important thing to note about Bollinger Bands is that they do not guarantee the future. It is not a prediction of the future, but merely an expression of the line within which approximately 99.7% of the price movements in recent stock price and exchange rate information fall within ±3σ, so it cannot necessarily be used as an indicator exactly how it is used.
It may break through after news
It may break through ±3σ after news. In this state, volatility is high, so we recommend not using it. It has been proven in the past that when important economic indicators or political changes that companies pay attention to occur, the market suddenly becomes turbulent, so technical analysis does not work. We do not recommend taking a position, so when this sign appears, keep a watchful eye. This may be a turning point for the direction.
contrarian tactics
Because of the above, the probability of staying within ±3σ is over 99%, so the way to look at the Bollinger Bands technical indicator is that if you go against the period and timing when you touch the upper and lower limits, theoretically you can absolutely You will win. However, as explained above, the important thing is that this is usually not the case. Most traders who use this tactic in the market are doomed to lose big instead of making big profits. Before using it, it is a good idea to check your basic trade movements and trends.
Contrary strategy from Bollinger band 3σ
It is generally said that there is a 99% chance that the Bollinger Bands will fall within the 3σ range, so conversely, many people make contrarian moves from the 3σ range. However, as explained earlier, Bollinger Bands do not provide compensation for the future, so in reality, there is a higher chance that they will not fall within the 3σ range. For this reason, it is said that contrarian strategies have a high chance of failing. The reasons for this are as follows. Whether buying or selling, there are often times when the closing price of the band breaks through by moving from within. This can result in the loss of a large amount of assets.
because there is a trend
There is a high possibility that the timing when the candlestick breaks through the 3σ of the Bollinger band is basically the timing when the trend occurs. Until then, the market is in a range, so the range of ±3σ of the Bollinger Bands is narrowed, so there is a high possibility that it will break through. The market spreads out of the range and creates a trend. At this timing, it is unlikely that the range will fall within the narrow ±3σ range.
order is correct
There is a high possibility that a trend will occur when the candlestick breaks through the 3σ of the Bollinger bands, so if you go against it, it is common to be beaten forever. Therefore, what traders have to do is follow order, not reverse order. Basically trading should not go against the big flow, because if you go against it, you will lose forever.
do not guarantee
The Bollinger Bands themselves do not guarantee that they will turn back from the Bollinger Bands 3σ. It’s not a prophecy that you’ll definitely turn around from here, and it doesn’t mean you’ll be compensated for breaking through. Bollinger Bands is just one of the technical analysis methods, not absolute. If you concentrate only on technical analysis, you will often be overwhelmed by the economic index economy.
XM is recommended
At XM, you can trade not only precious metals, virtual currencies, and stocks, but also foreign exchange. KIWAMI, an account type with even narrower spreads, has also been introduced. Therefore, it can be said that it is a highly recommended FX company for trading. It is equipped with tools such as MT4 and MT5, and basic indicators, making it very strong for buying and selling stocks. It is very useful for investors to analyze the market and make rough predictions.
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