Moving averages (MAs) are a very popular tool used by currency traders. They are a lagging indicator of the price action and short and long term trends are easier to identify using moving averages.
Most of the charting software freely provided by the broker can calculate the moving averages on the users specifications. MAs can be formatted to different style of trading and time frames. For example, in case you want to use a 120 time frame moving average, the prices of the last 120 times frames is added together and divided by 120.
A moving average can be calculated based on the opening, high, low or closing price. Most traders prefer to use the closing price because it is the most important. There are three types of moving averages. 1) Simple Moving Average. 2) Weighted Moving Average and 3) the exponential moving average.
The simple MA is simply calculated by dividing the price in each time frame by the number of time frames as the name suggests. A weighted MA places more weight to the current prices as compared to the prices in the last few time frames. In an exponentially smoothed MA, the chart is exponentially smoothed out with less emphasis on the prices in the latter time frames.
What are Bollinger Bands? Bollinger bands are plotted at a standard deviation above and below a moving average. The base of a band is moving average and the bands width is determined by volatility. Since standard deviation is a measure of volatility, the bands are self adjusting. Widening during volatile markets and contracting during calmer periods. The bands bracket almost 90% of the market action.
They are curves drawn in and around the price structure that provide relative definitions of high and low. Knowing when the prices are high and low, the trader can make rational investment decisions by comparing price action with the action of indicators.
Bollinger bands can be applied to mutual funds, forex trading, futures, indices etc. As volatility lessens, sharp price action tends to occur as the bands tighten. A continuation of current trend is strongly expected when the price moves outside the bands.
Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for the reversal of the trend. A move that originates at one band tends to go all the way to the other band.
The 10% price action outside the bands is most likely going to approximate areas where prices will return to within the bands. When the bands are flat and narrow, this indicates that price volatility is lower than in previous time periods.
When the bands begin to flare and widen, this indicates increased volatility and start of a new strong trend. Wide bands are usually taken as an indication of a very strong move.
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