If you are interested in currency trend following then you need to understand and cope with standard deviation of price – if you do not you will lose and it's a significant and underestimated area to study for currency trading success …
Lets look at currency trend following and how standard deviation can help you spot trends and hold them and get larger profits from your forex trading. Standard Deviation simply measures liquidity statistically and shows the difference of the values from the average one and is calculated by taking the square root of the variance, the average of the squared deviations from the mean.
In simple terms:
The volatility as well as the standard deviation of the market studied gets higher if the closing prices and average closing prices differ considerably. If the difference is small the standard deviation and the volatility of the market is low.
Humans make the price of any market and they will push prices below or above the average, when the emotions of greed and fear come into play. This never changes because human psychology never changes – humans always push prices to far up or down and always will. These price spikes tend to be temporary and prices historically fall back to fair value or the average.
You can spot price spikes on any forex chart and the big spikes simply do not last long they return to fair value – Understand this and you will have a head start on your quest for profits with your forex trading strategy.
Keep these points in mind:
1. The reversals of trends are accompanied by high volatility levels as prices blow off.
2. A chart breakout after low volatility that sees high capacity unfold can indicate anew big trend is underway.
3. High volatility within any trend in motion, is common and traders can take profits on these spikes and add to new positions on dips to the average.
A good tool to use in relation to volatility is the Bollinger Band which has two outer bands (the standard deviation) and the middle band which represents the average or mean price. The Bollinger band is an excellent tool for spotting new trends, spotting reversals and getting in on existing trends, when the risk / reward is at its best.
When following currency trends many traders can pick the currency direction correctly – but lose because they have their stops in the wrong place or hold trends for to long. The Bollinger band can help with all of these problems and help you enhance your profit potential.
One of the keys to successful trend following is balancing the risk reward and if you use Bollinger bands in conjuction with momentum indicators and support and resistance, you will time your trading signals with greater accuracy, stay with trends longer and see turning points better.
When currency trend follows, if you want to win and catch and hold the big trends you need to understand volatility and standard deviation of price – if you do not, you will probably lose, so make it an essential part of your forex trading education .