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A Quick Guide to Bollinger Bands

Bollinger BandsHow to Trade with Bollinger Bands

Technical analysis is considered an essential tool for succeeding in Forex trading. One well-used indicator often used to measure volatility is Bollinger Bands. This was a tool invented by a well-known technical trader, John Bollinger in the 1980s, whereby two Bollinger bands, the price of the currency, and a simple moving average are plotted onto a chart. An upper and low band are placed two standard deviations away from the moving average.

The chart easily displays trends; widening bands show high volatility whereas contracting bands indicate low volatility. When the bands squeeze the moving average, traders in the future will expect increased volatility and opportunities to enter the market. In a vice-versa scenario, when the bands are widening traders would expect lower volatility and opportunities to exit the market.

Traders tracking price movements have concluded that when close to the upper or lower band the market is overbought or oversold. The bands can be used as support (upper boundary) and resistance (lower boundary) lines signaling when to enter and leave a market. Most price action occurs within the two bands; only in extenuating circumstances such as a major event will a breakout occur.

KAMA (Kaufman's Adaptive Moving Average)

Kaufman's Adaptive Moving AverageKAMA is a trend-following indicator that aims to serve multiple missions, for example, to identify the trend and estimate key time turning points.

Introduction to Kaufman's Adaptive Moving Average

Kaufman's Adaptive Moving Average (KAMA) is designed to evaluate market noise and market volatility. The indicator was developed by Perry Kaufman in 1995 {Smarter Trading, Improving Performance in Changing Markets. New York: McGraw-Hill, Inc.}. You can use the KAMA indicator when trading with the MT4/MT5 platforms.


KAMA Settings

The recommended settings by Perry Kaufman include KAMA(10,2,30).

There are two ways to use KAMA:

(i) A longer-term KAMA to define the overall trend (10,5,30)

(ii) A shorter-term KAMA for trading signals (10,2,30)

The second (shorter-term) KAMA can generate trade signals when the price crosses above/below KAMA.