(PRWEB) November 09, 2011
Many Forex currency exchange traders labor under the misapprehension that in order to consider themselves to be working, they must have an active trade at all times during a trading session, or at the very least have pending orders waiting to be filled. This thinking not only affects beginning Forex traders. Many FX trading veterans succumb to the same myth. Fx experts at InvestTechFX introduce the 80/20 rule and the benefit of using Bollinger bands.
Now there is a simple rule that puts this idea to rest and supplies much-needed perspective to the question, To trade or not to trade. It is known as the 80/20 rule. The 80/20 rule was originally intended to help sales representatives budget their time. It stated that 80% of the representatives sales would be generated by 20% of their customers. It meant that the representatives should devote 80% of their time to servicing the 20% of the clients that generated the bulk of their sales.
This rule translates to Forex currency exchange trading in a very simple, elegant fashion. Adapted to Forex trading, the rule states: the currency markets spend 80% of their time trading in a range and 20% of their time changing that range. Expert traders have been using this rule as a guideline for years to help them determine whether to enter, maintain or exit a trade at the most opportune moment.
The shortcoming that will be fairly obvious to anyone who has spent any amount of time observing Forex price activity is that the 80% of the time that the market spends in the range is usually distributed randomly throughout a trading session. On top of that, the range can also occupy several different price channels and is not confined to just one. Again, even casual observation will reveal this.
There is a valuable tool available to traders that helps them to determine when Forex prices are in the range and when they are changing that range. One good source of this tool is a Forex ECN such as InvestTechFX. This specific tool is known as Bollinger bands and it is found in the Forex trading platform offered by InvestTech FX.
Bollinger bands are very simple to utilize and interpret. There are only two settings involved and even expert traders will generally accept the default settings that come in the trading platform. The default settings are 14 and 2.
The first setting, 14, refers to the number of candlesticks or OHLC price bars used to calculate the moving average of prices for any selected time period. This calculation is used to generate a line representing the average price of the last 14 periods. In other words, on a daily price chart, the moving average would indicate price activity over the last 14 days. On a five minute chart, the moving average would cover the last 70 minutes of price activity.
The other default setting, 2, refers to a statistical difference between the average price calculated over the 14 time periods and the closing price for those periods. This difference is called the standard deviation. Calculating the standard deviation involves some better than average math skills, but fortunately, modern trading platforms perform the calculation automatically.
When instructions containing the desired number of time periods and standard deviations are given to the trading platform, the result is depicted on the price chart as three bands. Visually, the three bands very much resemble an aerial view of a river, with the middle band being the current and the outside bands representing the riverbanks.
Interpreting Bollinger bands is straightforward and simple. If the bands representing the riverbanks are close together and traversing horizontally across the price chart, they indicate that prices are currently not doing much. This is a strong indication for the trader to avoid entering a new position or to consider taking profits or cutting losses from an existing position.
If they are far apart, this may indicate that the market is in one of the 20% periods where it changes its range. If the bands are pointing upward and the middle band is close to the upper band, it may be a good time to enter a long position or add to an existing long. Bands pointing down with the middle band near to the lower band indicate an opportunity to enter or add to a short position.
Using Bollinger bands, traders should not have to guess when, to trade, or not to trade. New and expert traders alike report a sense of relief knowing that they can apply the 80/20 rule and spend 80% of their time looking for high probability trading opportunities and 20% of their time acting on those opportunities.
For more information and a free, no risk chance to sample Bollinger bands with an Forex ECN provider, visit InvestTech FX at http://www.investtechfx.com.
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