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.