Forex traders use charts to analyze past and present market trends and make informed trading decisions. One of the primary tools traders use in technical analysis is the standard deviation line. A standard deviation line represents the degree of variation of a currency pair’s price from its average price. It is an essential tool for traders as it helps to identify potential trading opportunities and manage risks.
However, the standard deviation can be difficult to calculate manually, and it may not be easily visible on a forex chart. This is where implied standard deviation lines come in handy. An implied standard deviation line can be drawn on a forex chart to show the degree of variation of a currency pair’s price from its average price, without the need for a manual calculation. In this article, we will discuss how to draw implied standard deviation lines in a forex chart.
What is an implied standard deviation line?
An implied standard deviation line is a visual representation of the standard deviation of a currency pair’s price. It is drawn on a forex chart to show the degree of variation of the currency pair’s price from its average price. The implied standard deviation line is calculated using the Bollinger Bands indicator, a popular tool used by traders to identify potential trading opportunities.
The Bollinger Bands indicator consists of three lines: the middle line, the upper line, and the lower line. The middle line is a moving average that represents the average price of the currency pair. The upper and lower lines are the standard deviation lines, which are drawn at a distance from the middle line that represents the degree of variation of the currency pair’s price from its average price.
How to draw an implied standard deviation line?
To draw an implied standard deviation line on a forex chart, you need to add the Bollinger Bands indicator to the chart. The Bollinger Bands indicator is available on most forex trading platforms and can be easily added to a chart.
Once the Bollinger Bands indicator is added to the chart, you can adjust the settings to suit your trading style. The default settings for the Bollinger Bands indicator are a 20-day moving average and two standard deviations. However, you can adjust the settings to suit your trading style by changing the period and the number of standard deviations.
To draw the implied standard deviation line, you need to identify the upper and lower lines of the Bollinger Bands indicator. These lines represent the degree of variation of the currency pair’s price from its average price. The upper line represents the upper standard deviation line, while the lower line represents the lower standard deviation line.
Once you have identified the upper and lower lines, you can draw the implied standard deviation line by connecting the peaks and troughs of the upper and lower lines. The implied standard deviation line should be drawn parallel to the middle line and in the direction of the trend.
How to use the implied standard deviation line in trading?
The implied standard deviation line can be used in trading to identify potential trading opportunities and manage risks. Traders can use the implied standard deviation line to identify support and resistance levels and potential price targets.
When the currency pair’s price is trading close to the upper standard deviation line, it is considered overbought, and traders may look for short trading opportunities. Conversely, when the currency pair’s price is trading close to the lower standard deviation line, it is considered oversold, and traders may look for long trading opportunities.
Traders can also use the implied standard deviation line to manage risks. When the currency pair’s price is trading close to the upper standard deviation line, traders may consider placing a stop-loss order below the implied standard deviation line to manage their risk. Conversely, when the currency pair’s price is trading close to the lower standard deviation line, traders may consider placing a stop-loss order above the implied standard deviation line to manage their risk.
Conclusion
The implied standard deviation line is a useful tool for forex traders. It is an easy way to visualize the degree of variation of a currency pair’s price from its average price. Traders can use the implied standard deviation line to identify potential trading opportunities and manage risks. By adding the Bollinger Bands indicator to a forex chart, traders can quickly draw the implied standard deviation line and use it to make informed trading decisions.
