In this respect Bollinger Band pattern appears to be very useful. Bollinger bands are one of the technical analysis instruments widely used by the forex traders in order to forecast the currency price movements. In terms of forex this tool reflects the current deviations in the currency price action. The essence of the Bollinger bands is that they tend to widen when the trading process occurs in the conditions of substantial changes in prices (it is called high volatility) and narrow or even converge when the price changes are insignificant (low volatility). Bollinger bands can be calculated on the basis of the moving average.
Using Bollinger bands together with double tops and bottoms helps forex traders to place the stops correctly. Bollinger bands are capable of forecasting the levels at which forex traders have to exit the trades due to the fact that they include volatility by using deviations in measurements. The technique of applying Bollinger bans for setting stops in double tops and bottoms includes the following steps: firstly, to identify the first top or bottom and cover it with Bollinger band with 4 standard deviation characteristics. Secondly, to connect first double top or bottom and Bollinger band with a line. The point at which they cross identifies the proper stop-loss.
A question may appear as why to use four standard deviations, if two standard deviations seem to be reliable in 95% of cases. However, it must be mentioned that price action in the forex market is anything but normal. In this respect it’s a good idea to play safe and to set a wider standard deviation characteristic. Four standard deviations include 99% of all possibilities and are, as a result, provide the more reliable points of exit form the forex trading process. What is more important is that they work perfectly well in real-time conditions.
In general, combining Bollinger bands with double tops and bottoms in order to place proper stop-losses makes
forex trading even more effective and profitable.
