Bollinger Bands and Fibonacci Retracements in Forex Trading

Forex trading is a fascinating way of earning a living online, and if you are seriously considering entering this fascinating world of forex trading you must consider, by all means, the learning and understanding of a number of indicators that will give you invaluable help on predicting with a high probability the directions the forex market may take as you carefully analyze the price charts for any currency you are trading at the moment. Two of these important indicators are: Bollinger Bands and Fibonacci Retracements.

The basic interpretation of Bollinger Bands is that prices tend to stay within the space formed by the tracings of the upper and lower bands. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme currency price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of low volatility, the bands narrow to contain currency prices. The bands are plotted two standard deviations above and below a simple moving average. They indicate a "sell" when prices are above the moving average (or close to the upper band) and a "buy" when prices are below it (or close to the lower band). The bands are used by some forex traders in conjunction with other analyses, including RSI, MACD, CCI, and Rate of Change.
Fibonacci retracement levels are a sequence of numbers discovered by the noted mathematician Leonardo da Pisa during the twelfth century. These numbers describe cycles found throughout nature and when applied to technical analysis can be used to find pullbacks in the currency market. Fibonacci retracement levels are a quite effective way to see the future (at least in the forex markets), i.e., it involves anticipating changes in trends as prices near the lines created by the Fibonacci studies. After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels (See my articles on ?Fibonacci trading? for more detail about this).

In the currency markets, the commonly used sequence of ratios is 23.6 %, 38.2%, 50% and 61.8%. Fibonacci retracement levels can easily be displayed by connecting a trend line from a perceived high point to a perceived low point. By taking the difference between the high and low, the user can apply the % ratios to achieve the desired pullbacks.

About the author:
Adrian Pablo; Forex trader and freelance writer.

http://www.1-forex.com


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