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What Are Bollinger Bands and How Are Bollinger Bands Used in Forex Trading
What Are Bollinger Bands and How Are Bollinger Bands Used in Forex Trading

What Are Bollinger Bands and How Are Bollinger Bands Used in Forex Trading

Bollinger Bands are commonly used as a tool in technical analysts in a range of financial markets, including Forex. Determine the state of the market and identifying potentially profitable moves is an essential skill for traders.

Bollinger Bands demonstrate the prices and volatility over time of a given asset, which is used in a variety of trading strategies. The formula was first introduced by John Bollinger, an American financial analyst, in the 1980s. Since then, these statistical charts have been utilized to analyze the market data, inform trading decisions and manage algorithmic trading.

What Are Bollinger Bands?

Bollinger Bands demonstrate on-chart market volatility. They are two intervals drawn to predict potential volatility range for an asset, in relation to a moving average (MA). Normally, these price channels move across the chart symmetrically, but in certain market conditions, the distance between the bands varies significantly.

Bollinger Bands demonstrate on-chart market volatility.

Despite the existence of trends, there is no denying that market moves can be quite erratic. Therefore, the technical analysis applies this method for anticipating a price action. Bollinger Bands appear as three bands, the middle being a simple moving average usually plotted in a 20 minute period.

The other two bands (upper and lower) are reactive to volatility shifts and indicate the two extremes. They are calculated around the simple moving average, which will be shown below. They are drawn first and then projected into a channel that will contain the expected price changes. For trading decisions, the important pieces of information derived from the bands include the entry and exit points for trades. And unless the price moves way beyond the price channel, traders can be fairly certain about what to expect.

Bollinger Bands appear as three bands, the middle being a simple moving average, and the other two bands (upper and lower) being reactive to volatility shifts.

Bollinger Bands on the chart

Some prefer to connect the top or bottom of the price to determine the upper or lower extremes. And then, they extend parallel lines to illustrate the interval of price changes.

Bollinger Bands Calculation

Bollinger Bands can be used in most timeframes – from very short-term periods, such as five-minute charts, to daily, hourly, or monthly timeframes. Traders can adjust the following two parameters: period and standard deviations (StdDev).

Traders can adjust the following two parameters: period and standard deviations.

The most used period is set to 20 but it can be modified to suit a specific need. As for the standard deviation, it is often positioned at 2.0. Consequently, Bollinger Bands denoted (20,2) indicates that the period and the standard deviation are adjusted to 20 and 2, respectively. High StdDev means that the price is less likely to reach either band. With low StdDev, the price will possibly break out of the channel.

To calculate Bollinger Bands, you need to determine the Middle, the Lower and Upper Bands separately. The formulas are as follows:

Middle Band = 20-day SMA (simple moving average)

Lower Band = 20-day SMA – (20-day standard deviation of price x 2)

Upper Band = 20-day SMA + (20-day standard deviation of price x 2)

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