Using Bollinger Bands ® in Forex

Bollinger Bands® is a tool for technical analysis created by John Bollinger. This evolved from the trading bands concept, and its related indicators –bandwidth and %b – which are used to measure a price’s “lowness” or “highness”.

Similar to the Keltner channel, Bollinger Bands are volatility indicators. They identify a currency pair’s real-time volatility. (Volatility is what describes the degree by which a particular exchange rate changes over time.) Traders, in turn, always keep a close eye on currency volatility because volatility changes usually are a prelude to reversals in market trends.

More about Bollinger Bands®

Bollinger Bands are positioned over price charts, and consist of moving averages with bands defining the pricing channels.

 

Bollinger Bands have three lines:

•          Bollinger Upper Band

•          Bollinger Middle Band.

•          Bollinger Lower Band

 

Both the Upper and Lower Bands calculate deviations, and the Middle Band is simply a moving average. These bands help a lot in analyzing trends and reversals.

Traders utilize the Bollinger Bands to determine those levels that are overbought and oversold, and they indicate when to buy or sell.

How Traders Use Bollinger Bands®

As previously mentioned, what Bollinger Bands do is to measure deviations. What traders do is to generate two sets of Bollinger Bands: a set uses the “1 standard deviation” parameter, and the other uses the “2 standard deviation” parameter. By doing so, prices can be studied in a whole new different way.

Traders benefit from using Bollinger Bands as these bands adapt well to expanding and contracting prices at the same time when volatility increases and decreases. It widens and narrows the same time as price action, hence creating a trending envelope that’s very accurate.

 Bollinger Bands not only help in showing trends but also in providing reversal signals.

Standard Deviations

A standard deviation is a unit of measure that describes a dispersal pattern of data sets.

One standard deviation, by definition, includes more than half of data points from the average of a normal distribution pattern, and two standard deviations, on the other hand, include almost all – about 95% — of all data points.

You don’t have to measure standard deviations when working with Bollinger Bands. What you need to understand is the theory of how every standard deviation sets ranges for rate dispersal when it is compared to the moving average; you also need to understand how the data is used to find out and determine the buy and sell channels in your charts.

Bollinger Bands® Buy and Sell Channels

Traders use the Bollinger Bands to look for signals. They use the movement of the bands to see whether it’s ideal for buying and/or selling. They show changes using the bands’ width.

When there’s no reasonable volatility and when the market is slow, upper and lower Bollinger Bands get closer to one another. As bands widen, it indicates market volatility.

When prices touch the lower Bollinger Band, traders tend to buy. On the other hand, they exit when prices touch the middle Bollinger Band.

 

 

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