Forex - Indicators - Bollinger Bands

The Bollinger channel boundaries are not fixed and depend on the volatility of a financial instrument.

• It measures dispersion of data around its mean (Moving Average).
• It is a volatility indicator.
• The bands automatically widen when volatility increases and contract when volatility decreases.
• Their dynamic nature allows them to be used on different securities with the standard settings.

Usage:

• Can be used to determine entry and exit points for a trade.
• The bands are often used to determine overbought and oversold conditions.
• It can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend.

Bollinger Bands have a useful feature:

• The price stays about 90-95% of the time within the channel.

Bollinger Bands differ from regular Envelopes:

• Bollinger Bands expand or contract according to the standard deviation of the moving average.
• Envelops are often placed at a fixed percentage beyond the moving average.

• If there is no clear-cut trend, the price deviates slightly from the mid-line.
• As soon as the trend gains strength, the deviations become larger, and the channel's boundaries diverge.

Buying in an uptrend, if the price has tested the middle line from above and is heading towards a trend;

Selling in a downtrend, if the price has tested the middle line from below and is heading towards a trend.

We can use Bollinger Bands with different market condition or different market movements, we can use during uptrend, downtrend, and sideways. And with every market condition, there are many strategies that we can use but here we will mention some of them.

During an uptrend, prices move most of the time above their mean (Moving Average).

• It means that prices make higher lows and higher highs as there is control from buyers.
• Bollinger Bands can help us to identify this uptrend as we can find that prices move between Moving Average and Higher Band.

• Buy when prices crossover above Moving Average and the target will be the Upper Band.
  • Prices > MA = Buy, Upper Band = Target

During a Downtrend, prices move most of the time below their mean (Moving Average).

• It means that prices make lower highs and lower lows as Sellers control the market and prices move down.
• Bollinger Bands can help us to identify this downtrend as we can find that prices move between Moving Average and Lower Band.

• Sell when prices crossover below Moving Average and the target will be the Lower Band.
  • Prices < MA = Sell, Lower Band = Target

First, we need to understand how prices move during sideways as we can find that sideways are any movement except uptrend and downtrend.

Sideways show a balance between buyers and sellers as there is no full control on the market from one party of them.

• A sideways movement is any movement except uptrend and downtrend.

The strategy during sideways is to buy on the Lower Band and the target will the Upper Band, or sell on the Upper Band and the target will be the Lower Band.

• Prices on Lower Band = Buy, Upper Band = Target
• Prices on Upper Band = Sell, Lower Band = Target

• Buy on the lower band and take profit on the upper band.
• Sell on the upper band and take profit on the lower band.

Prices > MA = Buy, Upper Band = Take Target, Or = No Signal

During an uptrend, every Tick Price and Bollinger Band will be checked.

UPTREND

Price > MA

BUY

• Price > MA

CLOSE

• Price >= Upper Band

Prices < MA = Short, Lower Band = Target

During an uptrend, every Tick Price and Bollinger Band will be checked.

DOWNTREND

Price < MA

SELL

• Price < MA

CLOSE

• Price ⇐ Lower Band

Prices on Lower Band = Buy, Upper Band = Target

Prices on Upper Band = Sell, Lower Band = Target

During sideways, every Tick Price and Bollinger Band will be checked.

SIDEWAYS

• Price > Lower Band && Price < Higher Band

BUY

• Price = Lower Band

SELL

• Price = Upper Band

CLOSE

• (Buys) Price >= Upper Band
• (Sells) Price ⇐ Lower Band