Successful gold traders use every resource at their disposal to inform their trading and help them make profitable decisions that pay off in the short and long term. The first resource isn’t complicated, you just need to be aware of global news. Economic, political, and social changes can have huge effects on currencies and gold prices. Using world news to inform your trading is known as fundamental analysis.
The other important component is called technical analysis. This is about knowing how to read charts so you know where the market has been, where it is, and where it is going. Chart indicators tell you everything you need to know, as long as you can read them. A Bollinger Band is a chart indicator that can be used to measure the volatility of a market. Let’s explain what Bollinger Bands are and how they can be used to enhance your online gold trading:
An Introduction to Bollinger Bands
Bollinger Bands were created by investment manager John Bollinger in the early 1980s. The bands basically define high and low prices. The bands consist of three curves that are traced in relation to the price of a currency pairing. There are upper, middle, and lower bands, all drawn based on a given period of time (usually 20 periods) and two standard deviations, though these can be adjusted to give a longer or shorter frame of reference.
We don’t need to get into the technical side of Bollinger Bands to know how to read bollinger band charts. All you need to know is that Bollinger Bands contract and expand to let you know the activity on the market. When the bands contract, it shows you that the market is quiet. As the bands expand, it shows you that the market is active and the price is moving up.
Prices tend to return toward the middle of the bands after reaching the top or bottom, which is called the Bollinger Bounce. So if you’re using Bollinger Bands as a technical indicator and see that prices are falling toward the lower band, you can expect the prices to bounce back up soon. If the prices are nearing the upper band, you can expect them to settle toward the middle band soon. As you can see, the upper and lower bands act like support and resistance levels.
The Bollinger Squeeze
When the bands squeeze together, it means that a breakout is about to happen. If you sense a Bollinger Band squeeze, you can catch a move and take advantage.
There’s a lot of information to take in, but here’s also you need to know. When the daily closing price closes below the lower band, the wise move is to cover and go long. When the daily closing price crosses above the upper band, cover and go short.
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