If you are newbie or even a somewhat experienced trader, but live in the basement of Forex, you will get wiped out every single time. I promise you!The basement of Forex is full with indicator worshipgoing on, in all kinds of indicator blogger.com course your broker is leading the main quire fast to give you the free education and all of the The attempts of Forex trading system vendors to undermine the risks involved in Forex trading has been falling under increasing scrutiny from regulatory authorities. This is actually very good news as it should eliminate some of the trash that is being sold today Trading In The Forex Trenches by Matt Blackman Foreign exchange markets offer great liquidity, are less prone to being pushed around by major market players, and adhere to technical trading rules more closely than equity markets
Trading In The Forex Trenches
Bollinger Bands® were created by John Bollinger in the '80s, and they have quickly become one of the most commonly used tools in technical analysis. Bollinger Bands® consist of three bands—an upper, middle and lower band—that are used to spotlight extreme short-term prices in a security, trenches in forex trading.
The upper band represents overbought territory, while the lower band can show you when a security is oversold. Most technicians will use Bollinger Bands® in conjunction with other analysis tools to get a better picture of the current state of a market or security.
Most technicians will use Bollinger Bands® in conjunction with other indicators, trenches in forex trading, but we wanted to take a look at a simple strategy that uses only the bands to make trading decisions. It has been found that buying the breaks of the lower Bollinger Band® is a way to take advantage of oversold conditions. Usually, once a lower band has been broken due to heavy selling, the price of the stock will revert back above the lower band and head toward the middle band.
This is the exact scenario this strategy attempts to profit from. The strategy calls for a close below the lower band, which is then used as an immediate signal to buy the stock the next day. Below is an example of how this strategy works under ideal conditions.
Figure 1 shows that Trenches in forex trading breaks the lower Bollinger Band® and closes below it on December This presented a clear signal that the stock was in oversold territory. Our simple Bollinger Band® strategy calls for a close below the lower band followed by an immediate buy the next day.
The next trading day was not until December 26, which is the time when traders would enter their positions. This turned out to be an excellent trade, trenches in forex trading. December 26 marked the last time Intel would trade below the lower band. From that day forward, Intel soared all the way past the upper Bollinger Band®.
This is a textbook example of what the strategy is looking for. While the price move was not major, this example serves to highlight the conditions that the strategy is looking to profit from, trenches in forex trading.
Another example of a successful attempt using this strategy is found on the chart of the New Trenches in forex trading Stock Exchange when it broke the lower Bollinger Band® on June 12, NYX was clearly in oversold territory. Following the strategy, trenches in forex trading, technical traders would enter their buy orders for NYX on June NYX closed below the lower Bollinger Band® for the second day, which may have caused some concern among market participants, but this would be the last time it closed below the lower band for the remainder of the month.
This is trenches in forex trading ideal scenario that the strategy is looking to capture. In Figure 2, the selling pressure was extreme and while the Bollinger Bands® adjust for this, June 12 marked the heaviest selling. Opening a position on June 13 allowed traders to enter right before the turnaround.
In a different example, Yahoo broke the lower band on December 20, The strategy called for an immediate buy of the stock the next trading day. Just like in the previous example, there was still selling pressure on the stock. While everyone else was selling, the strategy calls for a buy. The break of the lower Bollinger Band® signaled an oversold condition.
That proved correct, as Yahoo soon turned around. On December 26, Yahoo again tested the lower band, but did not close below it. This would be the last time that Yahoo tested the lower band as it marched upward toward the upper band. As we all know, every strategy has its drawbacks and this one is definitely no exception. In the following examples, we'll demonstrate the limitations of this strategy and what can happen when things do not work out as planned.
When the strategy is incorrect, trenches in forex trading, the bands are still broken and you'll find that the price continues its decline as it rides the band downward. Unfortunately, the price does not rebound as quickly, which can result in significant losses. In the long run, the strategy is often correct, but most traders will not be able to withstand the declines that can occur before the correction. For example, IBM closed below the lower Bollinger Band® on February 26, trenches in forex trading The selling pressure was clearly in oversold territory.
The strategy called for a buy on the stock the next trading day. Like the previous examples, the next trading day was a down day; this one was trenches in forex trading bit unusual in that the selling pressure caused the stock to go down heavily.
The selling continued well past the day the stock was purchased and the stock continued to close below trenches in forex trading lower band for the next four trading days.
Finally, on March 5, the selling pressure was over and the stock turned around and headed back toward the middle band, trenches in forex trading. Unfortunately, by this time the damage was done. In a different example, Apple closed below the lower Bollinger Bands® on December trenches in forex trading, The strategy calls for buying Apple shares on December The next day, the stock made a move to the downside.
This is a case where the selling continued in the face of clear oversold territory. During the selloff there was no way to know when it would end. The strategy was correct in using the lower Bollinger Band® to highlight oversold market conditions.
These conditions were quickly corrected as the stocks headed back toward the middle Bollinger Band®. There are times, however, when the strategy is correct, but the selling pressure continues. During these conditions, there is no way of knowing when the selling pressure will end.
Therefore, a protection needs to be in place once the decision to buy has been made. In the NYX example, the stock climbed undaunted after it closed below the lower Bollinger Band® a second time. The strategy correctly got us into that trade.
Both Apple and IBM were different because they did not break the lower band and rebound. Instead, they succumbed to further selling pressure and rode the lower band down. This can often be very costly. In the end, both Apple and IBM did turn around and this proved that the strategy is correct.
The best strategy to protect us from a trade that will continue to ride the band lower is to use stop-loss orders.
In researching these trades, it has become clear that a five-point stop would have gotten you out of the bad trades but would have still not gotten you out of the ones that worked. Buying on the break of the lower Bollinger Band® is a simple strategy that often works. In every scenario, the break of the lower band was in oversold territory. The timing of the trades seems to be the biggest issue. Stocks that break the lower Bollinger Band® and enter oversold territory face heavy selling pressure.
This selling pressure is usually corrected quickly. When this pressure is not corrected, trenches in forex trading, the stocks continued to make new lows and continue into oversold territory. To effectively use this strategy, a good exit strategy is in order. Stop-loss orders are the best way to protect you from a stock that will continue to ride the lower band down and make new lows.
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The Strategy. Riding the Band Downward. What We Learned. The Bottom Line. Compare Accounts. Advertiser Disclosure ×. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Advanced Technical Analysis Concepts Using Bollinger Bands to Gauge Trends.
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Related Terms Bollinger Band® A Bollinger Band® is a momentum indicator used in technical analysis that depicts two standard deviations above and below a simple moving average. Bulge Definition and Uses A bulge is the upper bound of a Bollinger Band®. It is set a specified number of standard deviations from the mid-point.
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07/12/ · Code N' Trade. Dec 7, · 5 min In this article, I would like to empower you with my new Forex from the Trenches series and also with some useful tips The attempts of Forex trading system vendors to undermine the risks involved in Forex trading has been falling under increasing scrutiny from regulatory authorities. This is actually very good news as it should eliminate some of the trash that is being sold today If you are newbie or even a somewhat experienced trader, but live in the basement of Forex, you will get wiped out every single time. I promise you!The basement of Forex is full with indicator worshipgoing on, in all kinds of indicator blogger.com course your broker is leading the main quire fast to give you the free education and all of the
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