Most Forex traders use Bollinger Bands. Bollinger Bands make it easier to know if there is a trend. However, the contrarian strategy using Bollinger Bands does not fit so well, so be careful.
What are Bollinger Bands?
An indicator invented by financial analyst “John Bollinger” is called Bollinger Bands. Centered on the moving average line, the standard deviation calculated using statistics is displayed above and below it. In the example below, the yellow line is the 20-day moving average line and the standard deviation is above and below the chart. Going below this standard deviation signals a downtrend, and above it signals an uptrend. It becomes an indicator that allows you to know if there is a trend.
Source : AUD/JPY 1hour leg 01-08-2023 Tradingview
What is standard deviation?
Standard deviation is a numerical value calculated by how much variation there is from the average value of data for a certain period of time. The higher the standard deviation number, the higher the volatility. σ is used as the unit of standard deviation. σ can often be set in three stages.
- Probability of falling within ±1σ: 68.2%
- Probability of falling within ±2σ: 95.4%
- Probability of falling within ±3σ: 99.7%
Actual settings are often set to ±3σ. If you read the explanation of Bollinger Bands, you will find the above explanation, but many people who actually trade think that the probability of falling within ±3σ is 99.7%, which is not true. And it is right.
Probability of falling within ±3σ
It is said that the probability of falling within ±3σ exceeds 99%, but from the perspective of those who actually trade, you would think that this is not the case. There is a possibility that the candlestick will fit within ±3σ, but in reality it often protrudes normally. The Bollinger Bands caveat is not a promise of the future. It’s not a prediction of the future, it’s just a ±3σ line that contains about 99.7% of the price movement in the recent market.
Because of the above, the probability of falling within ±3σ exceeds 99%, so if you hit the upper and lower limits of the Bollinger Bands, you can theoretically win. However, as explained above, this is usually not the case. Most traders are doomed to lose big when fighting with this tactic.
Contrary strategy from Bollinger band 3σ
Since it is said that the probability that the Bollinger Bands will fit within 3σ exceeds 99%, many people are contrarian from 3σ. However, as explained earlier, the Bollinger Bands do not compensate for the future, so it is more likely that they will not fit within 3σ. Therefore, it is said that contrarian tactics are likely to fail. The reason is as follows.
because there is a trend
There is a high possibility that the timing when the candlestick breaks through the 3σ of the Bollinger band is basically the timing when the trend occurs. Until then, the market is in a range, so the range of ±3σ of the Bollinger Bands is narrowed, so there is a high possibility that it will break through. The market spreads out of the range and creates a trend. At this timing, it is unlikely that the range will fall within the narrow ±3σ range.
order is correct
There is a high possibility that a trend will occur when the candlestick breaks through the 3σ of the Bollinger bands, so if you go against it, it is common to be beaten forever. Therefore, what traders have to do is follow order, not reverse order. Basically trading should not go against the big flow, because if you go against it, you will lose forever.
do not guarantee
The Bollinger Bands themselves do not guarantee that they will turn back from the Bollinger Bands 3σ. It’s not a prophecy that you’ll definitely turn around from here, and it doesn’t mean you’ll be compensated for breaking through. Bollinger Bands is just one of the technical analysis methods, not absolute. If you concentrate only on technical analysis, you will often be overwhelmed by the economic index economy.
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