Forex Bollinger Bands

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What Are Bollinger Bands?

John Bollinger, creator of the Bollinger Bands® defines them as ”a technical analysis tool, they are a type of trading band or envelope”. Bollinger bands use a statistical measure known as the standard deviation, to establish where a band of likely support or resistance levels might lie. This is a specific utilisation of a broader concept known as a volatility channel.

A volatility channel plots lines above and below a central measure of price. These lines, also known as envelopes or bands, widen or contract according to how volatile or or non-volatile a market is. Bollinger Bands® measure market volatility and provide lots of useful information, including:

  • Trend continuation or reversal
  • Periods of market consolidation
  • Periods of approaching massive volatility breakouts
  • Possible market superior or bottoms, and potential price targets

The Bollinger Bands® accommodates 3 bands, that revolve around a centred simple moving average (SMA), with the default worth of 20, of which 85% of the time, the worth is control at intervals the subsequent default boundaries:

  • Lower band – SMA (minus 2 customary deviations)
  • Upper band – SMA (plus two standard deviations)

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Interpreting Bollinger Bands and How They Work

The most basic interpretation of Bollinger bands is that the channels represent a measure of ‘highness’ and ‘lowness’. Let’s sum up three key points about Bollinger bands:

  1. The upper band shows a level that is statistically high or expensive
  2. The lower band shows a level that is statistically low or cheap
  3. The Bollinger band width correlates to the volatility of the market

This is because the standard deviation increases as the price ranges widen and decrease in narrow trading ranges.

Therefore:

  • In a more volatile market, Bollinger bands widen
  • In a less volatile market, the bands narrow

The Bollinger Bands® contain a default setting in Forex as (20,2). because the market volatility increases, the bands can widen from the center SMA. Conversely, as the market value becomes less volatile, the outer bands will narrow. once victimization mercantilism bands, it’s the action of the worth (or price action) as it close tos the perimeters of the band that ought to be of specific interest to us.

For a technical analyst trader, trading near the outer bands gives a component of confidence that there’s resistance (upper boundary) or support (bottom boundary), however, this alone doesn’t provide relevant buy or sell signals; all that it determines is whether the prices are high or low, on a relative basis.

Given this information, a trader can enter either a buy or sell trade by using indicators to confirm their price action. Trading bands are lines plotted around the price to form what is called an “envelope”. Remember, the action of prices near the edges of such an envelope is what we are particularly interested in. The default Bollinger Bands® formula consists of:

  • A N-period moving average (MA)
  • An upper band at K times and a N-period standard deviation above the moving average (MA + Kσ)
  • A lower band at K times and a N-period variance below the moving average (MA − Kσ)

The Bollinger Bands® will be applied to nearly any market or security. For all markets and issues, a 20-day Bollinger band calculation amount may be a good beginning point, and traders ought to solely stray from it once the circumstances compel them to try to to so. As you lengthen the quantity of periods involved, you wish to extend the number of ordinary deviations employed. At fifty periods, 2 and a [*fr1] standard deviations are a decent selection, whereas at ten periods; one and a half perform the duty quite well.

50 Periods with 2.5 Standard Deviation 10 Periods with 1.5 Standard Deviation
Upper band = 50 Day SMA + 2.5 (S) Upper Band = 10 Day SMA + 1.5 (S)
Middle Band = 50 Day SMA Middle Band = 10 Day SMA
Lower Band = 50 Day SMA – 2.5 (S) Lower Band = 10 Day SMA – 1.5 (S)

Double Bollinger Bands Strategy

Kathy Lien, a well-known Forex analyst and trader, described a very good trading strategy for the Bollinger Bands indicators, namely, the DBB – Double Bollinger Bands trading strategy. In her book ‘The Little Book of Currency Trading’, she wrote that this was her favourite method. The DBB can be applied to technical analysis for any actively traded asset traded on big liquid markets such as Forex, stocks, commodities, equities, bonds, etc.

This is how you apply it on your chart:

  • Insert the Bollinger Bands® on the chart
  • Go to ‘Settings’ and select two standard deviations and a 20 period SMA
  • Insert a second set of the Bollinger Bands® with a different colour
  • Go to ‘Settings’ and select 1 standard deviation and a 20-period SMA

 

Depicted: Admiral Markets MetaTrader 5 Trading Platform – Settings for Bollinger Bands

Depicted: Admiral Markets MetaTrader 5 Trading Platform – Settings for Bollinger Bands

When the chart has been set up, we’d like to mark the zones next.

Depicted: Admiral Markets MetaTrader 5 Supreme Edition GBPJPY H4 Chart. Date Range: twenty four June 2020 – twenty eight July 2020. Captured 28 July 2020. Disclaimer: Charts for money instruments during this article are for illustrative functions and don’t represent mercantilism recommendation or a solicitation to shop for or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance isn’t essentially a sign of future performance.

  • A1: The higher Bollinger Band® (BB) line that’s 2 customary deviations off from line X, that is that the 20-period SMA
  • B1: The upper shot line that is one standard deviation from the a pair of0-period SMA
  • X: The 20-period SMA. This is each the centre of the DBBs, and therefore the baseline for decisive the placement of the opposite bands
  • B2: The lower shot line that’s one variance from the 20-period SMA
  • A2: The lower BB line that is 2 customary deviations from the 20-period SMA

These bands represent four distinct mercantilism zones utilized by traders to position trades.

  • The get Zone is between lines A1 and B1
  • The Neutral Zone one between lines B1 and X
  • The Neutral Zone 2 between lines X and B2
  • The Sell Zone is between lines B2 and A2

According to the main theory behind the DBBs, Ms Kathy Lien delineated that we should always mix the 2 middle areas so specialise in 3 zones:

  1. The higher quarter
  2. The middle half
  3. The bottom quarter

The DBB get Zone

When the worth is at intervals this upper zone (between the two upper lines, A1 and B1), it tells US that the uptrend is strong, which there’s the next likelihood that the price can continue upward. As long because the price candles continue to shut within the upmost zone, the percentages favour maintaining current long positions or perhaps gap new ones.

The DBB Sell Zone

When the price is in the bottom zone (between the 2 lowest lines, A2 and B2), the downtrend can in all probability continue. That tells US that as long because the candles pass on the bottom zone, a monger ought to maintain current short positions or open new ones.

The DBB Neutral Zone

When the worth gets at intervals the world outlined by the one variance bands (B1 and B2), there’s no sturdy trend, and therefore the price is probably going to fluctuate within a mercantilism range, as a result of momentum is not any longer strong enough for traders to continue the trend. The 20-day easy moving average (X) that is the baseline for the Bollinger Bands® is in the centre of the zone.

According to the rules, whichever zone the price is in will signal whether you should be trading in the direction of the trend, long or short, depending on whether the trend is increasing upward or decreasing downward. Basically, if the price is in the upper zone, you go long, if it’s in the lower zone, you go short. If the price is in the two middle quarters (the neutral zone), you should restrain from trading (if you are a pure trend trader), or trade shorter-term trends within the prevailing trading range. Usually, traders trade higher time frames adore H4 or operate a commonplace with this strategy.

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