What is Bollinger Bands?

Bollinger Bands is a technical indicator that allows users to compare volatility and relative price levels over a period of time.

It consists of three bands designed to encompass the majority of a security’s price action.

Prices will often meet resistance at the upper band and support at the lower band.

Bollinger Bands is an indicator used to compare volatility and relative price levels over a specified time period.

Three bands are plotted:

  • A simple moving average.
  • An upper band of the simple moving average plus two standard deviations.
  • A lower band of the simple moving average minus two standard deviations.

When the markets become more volatile, the bands widen, or move farther away from the average.

When the markets are less volatile, the bands contract, or move closer to the average.

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Bollinger Bands – the secret of distance

Bollinger Bands look like two lines (bands) that run above and below the moving average.

When the price abnormally deviates from the current trend, these bands start to converge or diverge and the distance between them changes—at that, we can predict a certain market situation.

By default, the period of the indicator is set to 14, and the standard deviation is set to 2.

You can adjust them yourself depending on the selected time-frame and instrument.

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How to understand signals

1. The bands are approaching the moving average

If they are gradually narrowing, the market is calming down, and the price begins to consolidate.

The bands are approaching the moving average

Sharp convergence indicates that volatility has decreased and predicts a strong trend movement.

bands are approaching the moving average

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2. The bands move away from the moving average

A smooth expansion of the range signals either that the current trend is strengthening, or that a new one is emerging.

The bands move away from the moving average

If the bands have diverged sharply, the market is highly volatile. We can expect a trend reversal.

If the bands have diverged sharply, the market is highly volatile. We can expect a trend reversal.

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3. The price chart went beyond a line

Either it is a small price correction within the current trend, or it is a reversal of the current trend. The exact analysis depends on the specific chart.

The price chart went beyond a line

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Conclusions – Bollinger Bands

  1. Most often, the price moves within the Bollinger Bands and pushes away from them.
  2. The narrowing or widening of the bands serves as a signal to understand the strength of the trend and to determine a reversal or consolidation of the price (flat).
  3. No indicator is always accurate, so please keep that in mind. First, master the new tool on a demo account.

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