The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing trading indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)
Bollinger Bands® with ATR and Fib Ratios
The last article on trading indicators described how to use Bollinger Bands®, very popular price bands developed by John Bollinger in the 1980’s. To review, Bollinger Bands® are derived by taking a simple 20-day moving average and adding a number to get a top band and subtracting a number to get a bottom band. The “number” is 2 standard deviations added to the moving average for the top band and subtracted from the moving average for the bottom band. The way standard deviations work is that 95% of the time, price will fall within 2 standard deviations of a move, which means that when price trades above 2 standard deviations, it will likely come back quickly.
This trading indicators article expands on Bollinger Bands®, by discussing Bollinger Bands® ATR and Bollinger Bands® Fib Ratios, two trding indicators that enhance the efficiency of the standard bands. Bollinger Bands® ATR uses the quotient of the Average True Range, and the Bollinger Bands® difference to plot its path. The user may change the inputs but the standard input uses the 55-period ATR and the 21-period BB with 2 standard deviations. In the 4-hour USD/CAD chart below, the 55-period ATR is below the SAB (standard ATR band) to illustrate the calculation. The calculation takes the 55-period ATR and divides it by the Bollinger Bands® difference between the orange bands in the price chart.
Bollinger Bands® Fib Ratios can be used for visual analysis of price volatility. When combined with other technical analysis methods, the ability to identify volatility can signal a change in trend or an acceleration in the current trend after a period of consolidation. In this calculation, the base line is the 20-period simple moving average (SMA), which presents as the middle band. The 3 upper bands are calculated using a smoothed average true range (ATR) multiplied by a Fibonacci multiple, where R1 = ATR * 1.618; R2 = ATR * 2.618 and R3 = ATR * 4.236. The 3 top Fib lines are plotted by adding R1, R2 and R3 to the SMA. The 3 bottom Fib lines are plotted by subtracting R1, R2 and R3 from the SMA. The orange lines are the standard Bollinger Bands®.
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