Bollinger Bands

Bollinger Bands are techniques that created in the 1980s by John Bollinger. They are plotted lines that represent an upper and lower trading range for a particular market price. It is a guide for traders to see how the future market would go. Each of the line is the predictable range of the moving average. So, the currency pair is than expected to trade within these limitations.

Bollinger Bands is use to determine when to buy or sell the market share. For example, buy a market share between the upper line and the lower line, which is unexpected, may not be a good deal. Normally the price will trade within the expectations (below the upper line and above the lower line). The directional trend is still useful to the traders even though a price is out of those limitations as those lines will widen accordingly.

Key features of Bollinger Bands:

1. A move starts when a line tends to go to reach the other line.
2. When the price is unstable, a sharp move will easily happen when the lines meet at a average level. Remember, the longer the unstable price takes, the higher the possibility a breakout may happens.
3. The current trend is usually maintained although there is a breakout as those lines will widen accordingly.
4. The top or a bottom (no matter inside or outside the lines) indicates the trend of market changing.

Configuration and Confirmations

To have a better result, withdraw two standard deviations from a 20 period simple moving average. However, there can be a variety of periods and standard deviations. A correct choose will provides a better and correct estimation.

Below is the chart of the EUR/USD pairing. Most of the prices are remain within the lines. However, there are some breakouts, especially in a more narrow range. Even though breakouts do happen, some breakout tends to restore within the lines range in a short while. If those breakouts represent a real market shift, the Bollinger bands will automatically widen accordingly.

Most of the time, Bollinger Bands is use with the Average Directional Index (ADX), RSI and Stochastic indicators.