MEAN REVERTING TRADING STRATEGY

Mean Reverting Trading Strategy

Technical analysis tools that are used quite frequently used in trading and to find support and resistance levels are the Bollinger Bands. The Bollinger Band was created / invented by John Bollinger. John Bollinger has a strong background in financial markets. Bollinger was a principal market analyst with the Financial News Network for many years.

In addition, Bollinger’s primary responsibility when working with the network was technical analysis content that was broadcast on air. The Bollinger Band aims to provide the user with a technical analysis strategy by providing a twenty-day moving average. In addition, Bollinger bands provide support and resistance levels that measure two standard deviations above and below the twenty-day moving average.

The beauty behind Bollinger Bands is that they are very strong at keeping up with trends. From a technical point of view one of the most important features of the Bollinger Bands is that when the market slows down. And the upper both slightly fluctuate as well, the lower bands close together. It is important to note that when the market slows down and the Bollinger Bands show a narrow range it is possible that a breakout is taking place and a larger trend may be on the way with it.

One of the best ways to use the Bollinger band is to find the boundary and then sit on this boundary for breakout. Bollinger Bands are fantastic when it comes after the trend.

Traders who use Bollinger Bands vary across the board. Some traders buy when the price action touches the lower band and exits. When the price action touches the moving average which is located at the center of the band. Conversely, other traders will buy when the price action goes through the upper band. And sell when the price action drops below the lower band.

Traders typically use the Bollinger band along with other technical indicators to identify price action. For example, oscillators would typically be used with non-oscillators such as trend lines. If / when these indicators establish the use of Bollinger bands; The trader will have a strong belief that Bollinger Bands are estimating the correct pricing as it relates to market volatility.

So, just how effective are Bollinger bands? Many studies have been done on the effectiveness of Bollinger bands. Analysts participating in the study over the past decades have consistently found no evidence. Or evidence of representation as it relates to a buy and hold approach.

In closing, Bollinger Bands are often used among the forex trading community. Many traders believe that the Bollinger band can be an extremely valuable tool when used correctly. Bollinger Bands are currently used along with other technical analysis tools and are a valuable resource for the Forex trader overall.

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