Bollinger Bands: An Introduction

The technical indicator called Bollinger Bands is named after the man who created this particular indicator: John Bollinger. This is one of the most popular indicators among forex traders and market participants. Even the best forex broker applies this indicator to forex price charts and it is simply two bands/ envelopes and a middle band that are based on a moving average and standard deviation. The default setting for this specific type of indicator is 20 period moving average and a standard deviation of 2. Obviously, you are free to adjust these settings to whatever you prefer.

Simply put, the Bollinger Bands serve as a measure of volatility because these bands or channels become wider as the markets become more volatile. Alternatively, these bands/ channels become narrower when the markets are becoming less volatile. This is the reason whythe bands are generally very narrow during the overnight session and are significantly wider when important economic data are announced and the major markets open.

If you take a closer look at this type of technical indicator, you will notice that the price is almost always within the two outer bands. Perhaps, the price is within these two bands approximately 95 percent of the time. With this, it can sometimes be an effective strategy to exit an existing long position when the price reaches the upper band (and vice versa when the price reaches a lower band).

Aside from this, another great strategy is to wait until the Bollinger Bands indicator is composed of two very narrow lines, which signals a quiet period of consolidation, and then wait for the price to break and close below or above one of these lines. When this happens, a new breakout is happening. The longer these bands stay very narrow, the greater chance there is of a big breakout taking place.

This is especially effective when you make use of one or two other indicators for confirmation. Just like any other strategies, this most likely works better on longer time frames.

So should you begin using Bollinger Bands for your next trade?

Obviously, it all depends on you. A lot of forex traders and the best forex brokers use this and find it useful. However, there are also some which do not find it very beneficial and prefer to use other technical indicators available. In the end, it is entirely up to you if you want to use this and incorporate it in your trading strategy.