Again one of the most popular bands used widely all across currency markets these days.
The so called Bollinger Bands (BB) were invented in the 1980s by John Bollinger. This very famous technical analysis tool is derived from the concept of trading bands. In order to define the bands we need three variables:
- Moving average – usually a 20-period moving average is standard.
- The lower band is per standard two standard deviations below the moving average.
- The upper line is two standard deviations above the moving average.
1) Bollinger Bands are a volatility indicator.
That means that in times of low volatility the bands are contracting. This is usually the case during a consolidation of prices. When another impulsive move starts out of the consolidation pattern the Bands begin to diverge from each other. Please see point 1 in the below chart for an example of contracting and diverging Bollinger Bands.
2) Bollinger Bands can signal a short term overbought or oversold situation.
Please see the points labeled with a “2” in the chart for details. Prices “outside” the BB usually mean that prices have rallied or plunged too much too fast and at least a technical correction is due. If you are a contrarian trader it can be a good countertrend entry opportunity if you sell when prices have rallied substantially above the upper BB and buy when prices have dropped below the lower BB.
3) The upper Bollinger Band acts as resistance and the lower BB as support.
That does not mean that a trend will reverse when prices touch a Bollinger Band but you have to be aware of the fact that some market participants act when these levels are reached. Please see the chart situations labeled with a “3” for examples of a countertrend reaction within the dominating trend once the Bands had been touched.
4) The middle Bollinger Bands.
The middle BBs can represent an interesting entry opportunity if you are a trend follower. Very often prices react to the middle Bollinger Band (the moving average) within a trend. Please see number 4 for examples in the daily chart of EUR/USD.
The so called Bollinger Bands (BB) were invented in the 1980s by John Bollinger. This very famous technical analysis tool is derived from the concept of trading bands. In order to define the bands we need three variables:
- Moving average – usually a 20-period moving average is standard.
- The lower band is per standard two standard deviations below the moving average.
- The upper line is two standard deviations above the moving average.
1) Bollinger Bands are a volatility indicator.
That means that in times of low volatility the bands are contracting. This is usually the case during a consolidation of prices. When another impulsive move starts out of the consolidation pattern the Bands begin to diverge from each other. Please see point 1 in the below chart for an example of contracting and diverging Bollinger Bands.
2) Bollinger Bands can signal a short term overbought or oversold situation.
Please see the points labeled with a “2” in the chart for details. Prices “outside” the BB usually mean that prices have rallied or plunged too much too fast and at least a technical correction is due. If you are a contrarian trader it can be a good countertrend entry opportunity if you sell when prices have rallied substantially above the upper BB and buy when prices have dropped below the lower BB.
3) The upper Bollinger Band acts as resistance and the lower BB as support.
That does not mean that a trend will reverse when prices touch a Bollinger Band but you have to be aware of the fact that some market participants act when these levels are reached. Please see the chart situations labeled with a “3” for examples of a countertrend reaction within the dominating trend once the Bands had been touched.
4) The middle Bollinger Bands.
The middle BBs can represent an interesting entry opportunity if you are a trend follower. Very often prices react to the middle Bollinger Band (the moving average) within a trend. Please see number 4 for examples in the daily chart of EUR/USD.
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