Forex trading can seem intimidating and complex, especially for beginners. However, with the right tools and knowledge, it can become an easy and profitable venture. One tool that could help traders gain an edge in the market is deviation levels. In this article, we will explain what deviation levels are and how to add them to a forex chart using indicators and channels.
What are Deviation Levels?
Deviation levels are technical indicators that are used to measure the distance between a moving average and the price of an asset. They are calculated by taking the difference between the current price and the moving average and dividing it by the standard deviation of the price. The result is a percentage value that indicates how far the price has deviated from the moving average.
Deviation levels can be used to identify potential trading opportunities. When the price deviates significantly from the moving average, it may indicate that the market is overbought or oversold. This could lead to a reversal in the price trend, which could present a trading opportunity.
How to Add Deviation Levels to a Forex Chart
There are several ways to add deviation levels to a forex chart, but we will focus on using indicators and channels.
Indicators
One of the most popular indicators used to calculate deviation levels is the Bollinger Bands indicator. This indicator consists of three lines – a moving average line, an upper band, and a lower band. The upper and lower bands are calculated by adding and subtracting a multiple of the standard deviation from the moving average line.
To add Bollinger Bands to a forex chart, follow these steps:
1. Open the chart of the currency pair you want to trade.
2. Click on the “Indicators” button in the top toolbar.
3. Select “Bollinger Bands” from the list of indicators.
4. Adjust the settings of the indicator to your liking. You can change the period, the standard deviation, and the color of the lines.
5. Click “Apply” to add the indicator to the chart.
Once the Bollinger Bands indicator is added to the chart, you can use it to identify potential trading opportunities. When the price touches the upper or lower band, it may indicate that the market is overbought or oversold, respectively. This could present a trading opportunity if the price is expected to reverse.
Channels
Another way to add deviation levels to a forex chart is by using channels. Channels are lines that are drawn parallel to a moving average line. They are used to identify the upper and lower bounds of a price trend.
To add channels to a forex chart, follow these steps:
1. Open the chart of the currency pair you want to trade.
2. Click on the “Drawing Tools” button in the top toolbar.
3. Select “Channels” from the list of drawing tools.
4. Click and drag the cursor to draw a line parallel to the moving average line.
5. Once the line is drawn, adjust the settings to your liking. You can change the color, thickness, and style of the line.
6. Repeat steps 4 and 5 to draw the upper and lower bounds of the price trend.
Once the channels are added to the chart, you can use them to identify potential trading opportunities. When the price reaches the upper or lower bound of the channel, it may indicate that the market is overbought or oversold, respectively. This could present a trading opportunity if the price is expected to reverse.
Conclusion
Deviation levels are technical indicators that can help traders identify potential trading opportunities. They are calculated by measuring the distance between a moving average and the price of an asset. Deviation levels can be added to a forex chart using indicators like the Bollinger Bands or channels drawn parallel to a moving average line. By using deviation levels, traders can gain an edge in the market and improve their trading performance.
