What is What is Bollinger Bands Indicator?

Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades.

Bollinger Bands, developed by John Bollinger in the 1980s, aim to create a dynamic view of market volatility, although at the time they were perceived as static. Let’s see some concepts to keep in mind and ways to use them.

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Bollinger Bands Structure – Concept and Use

Bollinger bands

Bollinger bands are classified within the technical trend indicators and are composed of three bands (upper, middle and lower), which are drawn in relation to the fluctuations of the currency pairs.

The middle band

The middle band is taken from the simple moving average of 20 periods (or any other time frame depending on the preferences of the trader).

The upper band

The upper band is calculated in a somewhat more complex way since the simple moving average is added twice (2x) the standard deviation of the 20-period moving average. Double the standard deviation is used for up to 68% more accurate results. This is considered to be the most appropriate signal because the standard deviation (1x) of the 20-day SMA would cause an excess of signals to be sent, exposing the individual trader to a speculation scenario.

The lower band

The lower band is calculated in exactly the same way, but instead of adding the 20-day SMA, it is subtracted.

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Signals Provided When Using Bollinger Bands

To understand more clearly how Bollinger bands can be interpreted as trading indicators, we will divide the market movements into three sub-categories: market swing, uptrend movement, and downtrend movement.

1. The swing of the market in the Bollinger bands

As can be seen in Figure 2 (chart 4H), the upper and lower Bollinger bands are considerably narrow. This should alert the trader that an uptrend is brewing and that they should be patient.

2. The upward trend of Bollinger bands

Continuing with Figure 2, we can see that the Bollinger bands provided a very clear buy signal when the price closed above the upper band (Point 1 in Figure 2). The trader should make a gross profit greater than 180 when the TP triggered on September 28, 2013 and the price closed below the midline of the 20-day SMA.

3. The downtrend of the Bollinger bands

In Figure 3, presented below, we can see that the Bollinger bands offered a very clear sell signal when the price closed below the lower band (Point 1 in Figure 2). The trader should make a gross profit above 120 when the TP triggered on October 7, 2013 and the price closed above the midline of the 20-day SMA.

Bollinger Bands Risk Management

It is strongly recommended that the trader have a good risk strategy in place so that his account can be replenished after the first or second false signal.

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