Bollinger Bands (BB), developed by John Bollinger is referred to as an trend following indicator. The main purpose of Bollinger Bands is to determine of whether the currency market is trending, ranging or about to breakout of the trading range. The bands themselves act as support and resistance levels.
Bollinger Bands are composed of three bands, the middle, the lower and the upper band.
Middle band: 20 period simple moving average (default)
Upper band: Middle BB + 2 x 20 period standard deviations
Lower band: Middle BB – 2 x 20 period standard deviations
USD/JPY Bollinger Bands (BB) Hourly Chart
Type of technical indicator: Trend Following
Why are Bollinger Bands useful in forex trading?
- 75% of the year currency pairs move between the upper and lower bands.
- BB are useful to determine whether we are in a range or in a trend.
- They give you some powerful insights into market volatility >> Wide bands indicate high volatilty. Narrow bands indicate low volatility.
- If the bands are really tight, expect a currency pair to breakout sooner or later since low volume creates small range and large trading volumes could push the pair heavily in one direction.
How to use bollinger bands to trade
Trending Markets: Bands are sloping up or down.
In down trending markets (bands are sloping down), look for shorts in the vicinity of upper Bollinger Band. Avoid long trades.
In up trending markets (bands are sloping up), look for longs in the vicinity of the lower Bollinger Band. Avoid short trades.
Range Bound Markets: Bands are aligned horizontally.
Look to go short at the upper BB.
Look to go long at the lower BB.
