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A Quick Guide to Bollinger Bands

A Quick Guide to Bollinger Bands

Technical Analysis -Bollinger BandsTechnical analysis is considered by some, essential for success in the Forex market. One well-used indicator often used to measure volatility is Bollinger Bands.

This is a tool invented by a well-known technical trader, John Bollinger in the 1980’s, whereby two Bollinger bands, the price of the currency and a simple moving average are plotted onto a chart. An upper and low band are placed two standard deviations away from the moving average.

The chart easily displays trends; widening bands show high volatility whereas contracting bands indicate low volatility. When the bands squeeze the moving average, traders in the future will expect increased volatility and opportunities to enter the market. In a vice versa scenario, when the bands are widening traders would expect lower volatility and opportunities to exit the market.

Traders tracking price movements have concluded that when close to the upper or lower band the market is overbought or oversold. The bands can be used as support (upper boundary) and resistance (lower boundary) lines signaling when to enter and leave a market. Most price action occurs within the two bands; only in extenuating circumstances such as a major event will a breakout occur.


How to Use Bollinger Bands

Bollinger Bands are an accurate measure of the market’s performance its focus on volatility keeps the indicator adjusting to market conditions. In addition, traders trawling through price data only need to look within its two bands. Furthermore, this indicator can be applied to virtually any security or market.

As useful as the data is even John Bollinger, the architect of Bollinger Bands, advises that the indicator should be used in conjunction with others to find more direct market signals. Most standard charting packages will include a Bollinger band indicator. However, some charting packages, such as MT4’s charting package, are notably superior to others.


(1) Measure Market Volatility

(2) Identify Trend-Reversals

(3) Set Early-Triggers

(4) Evaluate Oversold/Overbought Market Levels

MT4 Settings: 20 Periods Simple Moving Average | 2 Standard Deviations


Bollinger Bands Calculation

Here is how each of the three bands is calculated:

 Upper Band = 20-day Simple Moving Average + (20-day Standard Deviation of Price x 2)

 Middle Band = 20-day Simple Moving Average

■ Lower Band = 20-day Simple Moving Average - (20-day Standard Deviation of Price x 2)

Calculating the %b {Default setting (5,1)}

■ %b = (Price ‐ Lower Band) / (Upper Band ‐ Lower Band)


Where to trade using Bollinger Bands?

In order to trade currencies using the Bollinger Bands, you need a Forex trading account.

Vantage FX is an award-winning, Australian based forex broker. It offers its clients the opportunity to trade through MT4, MT5 and several other online trading platforms and apps. This forex broker is renowned for its exceptionally tight spreads and industry-leading execution. Furthermore, this broker also offers its clients an unlimited demo account. This means that you can practice trading using Bollinger bands until you feel that you have mastered the indicator. To open an account, visit their website at www.VantageFx.com, once you have opened an account and deposited money, you will then be able to open an unlimited demo.


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