How 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 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.

The VIX or else the "S&P500 Fear Index” is a market thermometer measuring the risk appetite of equity investors. The VIX is a contrarian indicator that can help identify extreme market movements and potential reversals.

Introduction to the VIX Index

The Volatility Index or else the VIX Index of the Chicago Board of Exchange (CBOE) indicates the expected volatility of the S&P 500 Index Options. In other words, it predicts the future volatility of the S&P 500 stock index. The Chicago Board of Exchange introduced the VIX Index in 1993 but added a VIX futures contract, not before 2004.

The VIX index measures the level of fear or greed in the stock market. In general, investors trade the VIX for hedging and speculation:

• Hedging against the volatility risk of their existing S&P 500 positions, as historically, the VIX Index is negatively correlated to equity prices

• Speculation on potential VIX volatility movements

  Read more: Trading the VIX (CBOE)