Bollinger bands consist of three lines. It is a statistical approach to Forex trading. Upper and lower lines are two standard deviations above and below a 20-day exponential moving average. Standard deviation is a statistical measure of volatility. These bands area always adjusting: widening during volatile markets (market are volatile when a there is a lot of price action) and contracting during non so volatile market periods.

Using two standard deviations ensures that 95% of the price data will fall between the two Bollinger bands. This is the statistical meaning of the two standard deviations. Prices are considered to be overbought, or better, statistically overextended to the upside when they touch the upper band and oversold or overextended to the downside when they touch the lower band.

One could use the upper and lower bands as price targets. If price bounces off the lower band and crosses above the 20 day average then the upper band becomes the upper price target and vice versa.

In a strong uptrend prices tend to fluctuate between the upper band and the 20 day moving average. A crossing of the 20 day average warns of a possible reversal to the downside.
A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets. The figure below (Figure 5.11) shows the use of Bollinger Bands in real market. Study carefully Bollinger Bands. They are one of the most useful tools in live trading.

Illustration of a chart with Bollinger Bands

This entry was posted on Monday, March 26th, 2007 at 6:17 am and is filed under Technical Indicators. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.