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Recent Posts. Bollinger bands consist of a set of three bands drawn in relation to price: there is the period moving average in the middle, with an upper and lower band of two standard deviations above and below the simple moving average.

Bollinger bands use a statistical measure known as the standard deviation, to establish where a band of support or resistance levels might lie. This concept is also known as a volatility site. A volatility site plots lines above and below a central measure of price. These lines, also known as envelopes or bands, widen or contract according to how volatile or non-volatile a market is. Bollinger bands® measure market volatility and provide lots of useful information, including: Trend continuation or reversal Periods of market consolidation Periods of upcoming large volatility breakouts Possible market tops or bottoms, and potential price targets Bollinger bands are a trend indicator that detects the volatility and dynamics of the price on the market.

The bands contract when the market volatility is low and expand when volatility increases. During periods of low volatility, the bands are narrow, while during periods of high volatility Bollinger bands expand drastically. The upper band shows a level that is statistically high or expensive The lower band shows a level that is statistically low or cheap The Bollinger bandwidth correlates to the volatility of the market For a technical point of view, trading near the outer bands provides an element of confidence that there is resistance at upper boundary or support at bottom boundary , however, this concept alone does not provide relevant buy or sell signals; all that it determines is whether the prices are high or low, on a relative basis.

So, the general consensus is that when the price reaches the upper band it is considered as overbought and when price approaches lower band it is considered oversold. The Bollinger bands have a default setting of 20,2. When using trading bands, it is the price action as it nears the edges of the band that should be of particular interest to us. Now, regarding standard deviation of the Bollinger bands.

What is it? The standard deviation is basically a number expressing how much the values of the price differ from the mean value. Ok, how to use this information? If you decide to back test Bollinger bands and play with its inputs, you can adjust the value of the standard deviation. If you lower it, you will see the price leaving the bands often, probably offering a lot of noise. However, if you increase it to 3, you will realize that the price will leave the band rarely, and might be better to find dynamic zones of support and resistance.

So, lower settings on the Bollinger bands will generate more trading signals, but will also increase the number of false signals, as the price movement will exit more often from the bands. On the other hand, a 2. Now, I prefer to trade with the odds in my favor. So, if a standard deviation of 3. How to trade Bollinger bands? The use of Bollinger bands varies among traders depending on their overall trading strategies, styles and goals.

The key to staying profitable is to quickly reverse a position when a fake breakout occurs. In the best Bollinger Bands trading strategies the ndicator is so visible that it is practically impossible to miss a trend. What traders are doing is they try to identify ranging and trending conditions with the Bollinger Bands. For this, the distance between the UBB and the LBB is key. The chart below shows the EURUSD daily time frame and the examples used in this article.

Before the bearish breakout, check the distance between the UBB and the LBB. It is the smallest distance on the whole chart, signaling the fact that a break is imminent. It shows a period more than two months where price simply consolidated, between August and October For traders using pattern recognition to spot trades, that period shows a triangle.

It forms on the EURUSD pair and the small distance between the UBB and LBB coincides with the end of the triangle. The next step is to go and do some back-testing on historical data. But have two conditions in mind: use the same currency pair and the same time frame. The idea behind back-testing this is to see if similar small distances between the UBB and LBB lead to important breakouts that you can trade just like the example above shows.

Different currency pairs have different volatility levels, as not all pairs are moving in the same way. Liquidity plays an important role, and the trading session as well. Below you will see a trading example that includes the Bollinger Bands indicator. This is a video that shows how to use the indicator successfully. I entered a long trade based on bullish signals of the Bollinger Bands.

I suggest that you all see the video in order to understand how the indicator works. This is an opportunity to observe the Bollinger Bands indicator in action. And the best thing is that you can see the video for free. You only need to add your email and names to play the video. The price started shooting up hitting the upper Bollinger Band. At the same time, the two bands were expanding signalizing that the volatility is increasing.

I opened a long trade placing a Stop Loss order on a relative distance. Then, I stayed in the trade until the price broke the middle band in bearish direction. It was enough for me to see a break through the middle band. And the reason for this is that the two bands were shrinking at that time, meaning that the volatility was decreasing.

To sum up, the Bollinger Bands indicator is a great tool to analyze a currency pair. It works both for scalping and for trend riding. Best results aappear by using it together with other technical analysis tools. This way, the Bollinger Bands will act as a confirmation and will bring more confidence to the overall trading process. In the end, trading is a game of probabilities. And it is not possible to have one hundred percent winning trades.

What matters is the trading account to grow in time. Profitable trading is the result of mastering the available trading tools. The Bollinger Bands indicator is perfect for that. Your email address will not be published. Forex Trading with Bollinger Bands Strategies Muhammad Awais April 20, No comments. How to Read Bollinger Bands There are multiple ways to use the indicator. How to Add to a Bollinger Bands Breakout Strategy There are two ways to deal with an underlying trend with Bollinger Bands strategies.

Reversal Patterns with Bollinger Bands Indicator A great way to learn how does Bollinger Bands work is to look for reversal patterns given by Japanese candlestick techniques. Bollinger Bands Breakout with Elliott Waves Another great way to use Bollinger Bands is to integrate the indicator with the Elliott Waves theory. Bollinger Bands with Corrective Waves According to Elliott, a 5-wave structure is impulsive and is labeled with numbers.

Bollinger Bands with Impulsive Waves In the example above, the Bollinger Bands indicator works to find entries in a corrective wave of a bigger degree. Successful Bollinger Bands Trading Example Below you will see a trading example that includes the Bollinger Bands indicator.

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Bollinger bands are one of the most useful indicators ever devised, combining both trend and a measure of volatility. The calculation technique is deceptively simple. You start with a period simple moving average. Then you have your software calculate the standard deviation of those 20 periods of data, and double it. You add that number to the period moving average to get an upper band and subtract it from the period average to get the lower band. The two bands together outline the maximum limits that your price is likely to reach.

You do not have to understand the exact methodology for deriving a standard deviation because we are lucky enough to have software to do it for us. You do need to understand that the standard deviation is a measure of variability away from a central point, in this case the period moving average. This is why when you get a breakout of one of the bands, it is a statistically rare and abnormal event and worthy of your close attention.

Something big is going on in this currency when it breaks a B-band. Bollinger observed that when a price breaks out of one of the bands, it is an ideal trading opportunity.

We expect the price to continue in the direction of the breakout. But in Forex, a B-band breakout is hardly ever followed by much additional movement in the same direction. After two to five periods above the upper B-band, for example, we almost always see the price retrace to the moving average and sometimes all the way to the other, lower B-band.

Therefore, in Forex, you might consider that a breakout above an upper B-band is a contrarian indicator. You should be thinking of exiting a long position and perhaps going short.

Another idea is that when the price is over the period moving average and headed for the upper B-band, your position is safe until it reaches the upper band, whereupon we expect it to retreat — after all, it is statistically rare and abnormal for the price to exceed is normal dispersal range.

The upper band serves as a form of resistance. Similarly, the lower band serves as a form of support. Another way to see the upper band is as the level at which the currency will be considered overbought, and the lower band as the level where it would be oversold. We do not buy this interpretation or rather this use of the terms overbought and oversold.

For one thing, we have better indicators to identify overbought-oversold, like relative strength and the stochastic oscillator , which use the relationships among the bar components especially the high and the close to gauge trader sentiment toward current prices.

Another reason is that the period moving average is a lagging indicator and is limited to 20 periods. Big events could have been developing 22 periods back but they would not show up on the current band. Bollinger bands are adaptive by their very nature and offer no anchor or historical perspective.

Finally, you can have a series of 40 periods or more of a uni-directional move. That would tend to contract the bands. By definition we assume a central tendency, i.

See the chart below showing the Australian dollar with a Bollinger band. Many of the instances of the price breaking the Bollinger band are circled — and note the breakouts last no more than five days and usually only one or two. After a breakout, the price moves toward the other band. When the two bands are fairly close together, clearly the price is not varying by much away from the benchmark period moving average.

When a normal width band contracts and becomes a tight, narrow band, it means the traders in that currency pair are undergoing a period of uncertainty. Bollinger calls it the squeeze , and the squeeze almost always precedes a breakout. You do not know from the Bollinger bands in which direction the breakout will occur. To figure that out, you need to look to other indicators.

However, you have been warned — a narrow Bollinger band is the time to be paring your positions, not adding to them or betting the ranch. When the bands are relatively far apart, it means volatility is high. If you have good directional evidence of a rally or a rout, high volatility is not a worry because we expect a trend to continue in the same direction until something comes along to disrupt it. However, consider that you would also get wide bands in an untrended but spiky price series. When traders are of wildly different views on where a price should go, you can see a spike high that may be over points from a spike low only two hours or two days later.

The next chart depicts the euro on a one-hour basis. You see a narrow band widening out to a wide band on a spike high followed by a spike low, but you would be hard-pressed to say there is any directional trend on this chart. Bollinger bands can be used as a rough form of support and resistance , i. But the period moving average on which the indicator is built has its own limitations, mostly the core concept of the central tendency — that the price should return to the norm, the period moving average.

But Forex prices can be highly trending, and the central tendency suspended for long periods. Moreover, one of the good features of Bollinger bands, that they are adaptive to changing conditions, is also a drawback.

You are not getting any perspective on recent moves, such as the recent highest high and lowest low, or the momentum of the current move. Often used together with Bollinger bands are the MACD , a momentum indicator , and the parabolic SAR , which has a strong momentum component. Pro tip: Depending on what timeframe you are trading, you want to study how many periods after the first B-band breakout you see the price persisting in the same direction.

On the daily chart on Forex, we seldom see a move beyond a B-band last more than 5 days. However, on the hourly or 4-hour chart, it may last more time — an opportunity for you. When the price breaks out above the upper Bollinger band in Forex, you should. MT4 Forex Brokers MT5 Forex Brokers PayPal Brokers WebMoney Brokers Oil Trading Brokers Gold Trading Brokers Muslim-Friendly Brokers Web Browser Platform Brokers with CFD Trading ECN Brokers Skrill Brokers Neteller Brokers Bitcoin FX Brokers Cryptocurrency Forex Brokers PAMM Forex Brokers Brokers for US Traders Scalping Forex Brokers Low Spread Brokers Zero Spread Brokers Low Deposit Forex Brokers Micro Forex Brokers With Cent Accounts High Leverage Forex Brokers cTrader Forex Brokers NinjaTrader Forex Brokers UK Forex Brokers ASIC Regulated Forex Brokers Swiss Forex Brokers Canadian Forex Brokers Spread Betting Brokers New Forex Brokers Search Brokers Interviews with Brokers Forex Broker Reviews.

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Contact Webmaster Forex Advertising Risk of Loss Terms of Service. Advertisements: EXNESS: low spreads - just excellent! Please disable AdBlock or whitelist EarnForex. Thank you! EarnForex Education Forex Course. Trading Ideas Using Bollinger Bands Bollinger observed that when a price breaks out of one of the bands, it is an ideal trading opportunity. Quiz : 1. Bollinger bands are normally formed on the basis of.

Bollinger bands lack the capacity to inform you about. YOUR RESULT. Previous lesson Topic 03 - Momentum. Indicators Topic 04 - Bollinger Bands. Topic 01 - Moving Averages Topic 02 - Moving Average Crossover Topic 03 - Momentum Topic 04 - Bollinger Bands Topic 05 - Moving Average Convergence-Divergence MACD Topic 06 - Parabolic SAR Topic 07 - Stochastic Oscillator Topic 08 - Relative Strength Index Topic 09 - Average Directional Index Topic 10 - Average True Range Topic 11 - Ichimoku Kinko Hyo Topic 12 - Leading vs.

Lagging Indicators Topic 13 - Is There a Best Indicator? Next lesson Topic 05 - Moving Average Convergence-Divergence MACD.

The standard deviation is basically a number expressing how much the values of the price differ from the mean value. Some templates are already integrated with the MT4 Indicators from the MetaTrader Platform. If you are using the same settings for all types of trading, you are misusing it. You see a narrow band widening out to a wide band on a spike high followed by a spike low, but you would be hard-pressed to say there is any directional trend on this chart. Expanding volume on a breakout is a sign that traders are expecting that the price will continue to move in the breakout direction. Since I have helped thousands of traders to take their trading to the next level. Table Of Contents:.

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