Forex 101 - Bollinger Bands

November 23, 2016

What are Bollinger Bands?

 

Just like moving averages, Bollinger Bands are another indicator that can be used in technical analysis.  They were created by John Bollinger.

 

How to use Bollinger Bands

 

Bollinger Bands can be used in Forex analysis to determine whether a market is actively moving or if a market is lacking volatility. In other words, Bollinger Bands can be used to determine how "loud" a market is. The technical indicator signals market "loudness" by placing 3 lines (bands) on a chart. When these bands are tight, this suggests that price is "quiet". When the bands widen, this suggests that price is more active. Look at the examples below...

 

"Loud", active market

 

Below is an example of the Bollinger Bands being wide and price being very active..

 

 

"Quiet", slow market

 

Below is an example of the Bollinger Bands being tight and price being not so active...

 

 

The Bollinger Band Squeeze

 

The main way that Bollinger Bands are used as part of a Forex trading strategy is by using the Bollinger Band squeeze. This method entails waiting for Bollinger Bands to become very tight and then to trade in the direction of the first active and large candle. The screenshots below demonstrate this...

 

1. Boliinger Bands are tightening

 

2. Candle closes against lower Bollinger Band, signalling that price could move lower

 

 

3. Price is bearish and moves much lower

 

This method can also be traded when a candle closes against the upper band, in anticipation of a bullish move.

 

The Bollinger Band Bounce

 

Another way to use Bollinger Bands as part of a Forex trading strategy, is to use the Bollinger Band Bounce. This method takes the approach that when price closes at the upper band, price is likely to reverse back to the centre band. When price closes at the lower band, price is likely to reverse back to the centre band.

 

The example below demonstrates this. Do you notice that every time a candle closes around the upper or lower bands, price returns to the centre band?

Please check out more Forex Indicators on our Forex 101 Indicator Page.

Please reload

There is a very high degree of risk involved in trading.Past results are not indicative of future returns. Technical Forex and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice.Information for forex trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of Technical Forex may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading Forex, Options on Forex, and any retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Technical Forex is not an investment advisory service, is not an investment adviser, and does not provide personalized financial advice or act as a financial advisor. Technical Forex exists for educational purposes only, and the materials and information continued herein are for general informational purposes only. None of the information provided in the website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, recommendation or sponsorship of any company, security, or fund. The information on the website should not be relied upon for purposes of transacting securities or other investments. You hereby understand and agree that Technical Forex does not offer or provide tax, legal or investment advice and that you are responsible for consulting tax, legal, or financial professionals before acting on any information provided herein.

Technical Forex is dedicated to providing high quality content on Forex technical analysis - info@technicalforex.com

© 2015-2020 TECHNICAL FOREX