April 6, by Steve. This is a Guest Post by: This article is used here with permission and originally appeared here on ColibriTrader. Bollinger Bands are a very popular technical indicator that measures the price volatility of a financial instrument. Bollinger Bands are showing the volatility of the price by plotting two bands, the upper and lower band, two standard deviations away from a simple moving average SMA.

In general, when the market becomes more volatile, the bands widen, and in less volatile period the bands become narrower. If the bands become narrower and track parallel for an extended time, the price will usually bounce of the upper and lower bands, which take a role of support and resistance lines in sideways trading conditions.

Note how during more volatile periods the bands widen left side of the chartand contract during less volatile periods right side of the chart.

This happens because a standard deviation is measuring the dispersal pattern of a data set, i. The bands also act as strong support and resistance levels for the currency pair, and the pair rarely trades outside the bands. Traders should not rely solely on Bollinger Bands for trading signals. Best results are achieved when combining with other non-oscillator indicators, like candlestick patterns or chart patterns.

Another popular technical-trading approach is combining Bollinger Bands with MACD and RSI. They simply measure the price volatility according to standard deviation calculations of the moving average. John Bollinger suggests combining other technical indicators based on price direction for confirming price direction and placing trades. However, the upper and lower bands are still often used as price targets by traders.

The usual strategy used with Bollinger Bands is waiting for the price bouncing off the bands, and taking the opposite band as a price target. If the price touches the lower band and reverses, crosses above the middle band, then the upper band is considered the next price target. If the price bounces off the upper band, crosses the middle line moving averagethen the lower band is considered as the next price target.

Another use of Bollinger Bands is for spotting overbought and oversold conditions.

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If the price reaches the upper band, it is usually considered an overbought area which implies opening a short position, and vice-versa. As the number of periods used for the moving average are also used for calculating the standard deviation of the moving average, only small adjustments are needed in the standard deviation multiplier.

While making adjustments to the standard settings, traders should make sure that the majority of price-action is still taking place inside the bands. In case the pair never trades outside the bands, a smaller multiplier is required; while the opposite is true if the price breaks the bands too often. When the bands come very close together, and the distance from the moving average becomes very small, it is called a squeeze. This market condition implies very low volatility, and traders should be prepared for a possible increase in future market volatility and trading opportunities.

Bollinger Bands - Technical Indicators - Analytics - MetaTrader 4 Help

The opposite situation, in which the bands are wider apart, means that the market volatility is very high. In this case traders should prepare for a decrease in volatility and eventually consider exiting a position.

The following chart shows a squeeze with a succeeding rise in price volatility. Bollinger bands ru breakout occurs when the price closes outside the upper or lower band. Therefore, John Bollinger suggests using other direction-based indicators for entering a trade. The following chart shows a fake breakout:. Some traders also use a breakout bollinger bands ru entering a trade.

Because the bands act as support and resistance lines, a breakout of the price outside these bands is considered a potential trading possibility. In the beginning of Decemberthe price moved outside the upper band with a long bullish candlestick.

To confirm the breakout, a trader should wait for a second signal, which in this case give the following candlestick patterns. This is the first signal showing the dominance of buyers. The next period, forming a bullish long-shadow candlestick, and with a close just on the border of the upper band, confirms once more that an uptrend is possibly ahead. Now it is time to enter a long russian stock market bigcharts. The pair trades the next few months close to the upper band, with a few fake breakouts, and touches quite often the middle band, i.

The position should be closed either when the price falls to the lower band, or the trend shows signs of exhaustion. In this case, the price failed to make a new higher high on the 24 th of Marchforming a double top with the upper band acting as a resistance level. This is a level where trader would consider exiting the position. Another effective strategy to exchange binary option strategy based on Bollinger Bands, is riding the bands.

During powerful down and uptrends, the price tends to stick to the lower and upper bands, respectively. This shows that there is still enough steam behind the trend, and that it will likely continue in the future.

A price sticking to one of the bands, is therefore a major statistical event which happens in exceptional conditionslike changes in the currency fundamentals. On 20 th of Augustthe price broke japan forex intervention previous high and traded outside the upper band for a option trading strategies spread. Opening a long position after the break of resistance would give the opportunity to ride the upper band, as the price has touched the upper band until 25 th of August.

After the price closed away from the band, traders should close the long position with a nice profit in the account. The upper and lower bands show the volatility of the pricebecause they are based on standard deviation calculations.

The breakout itself is not considered a trading signalas it provides no clue about the direction or extent of the price movement. Bollinger Bands are also not a standalone trading strategyand should be combined with other technical indicators which rely on a different set of data, like price patterns and trendlines.

Bollinger Band Divergence by Russ Horn | Forex Winners | Free Download

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New Trader U Helping Traders Thrive. Email Facebook Instagram LinkedIn Twitter. Home About Blog eCourses Our Books Free Stuff Member Resources Login Forums. Bollinger Bands consist of three parts: The middle bandwhich is a N-period simple moving average. The standard setting is a day SMA. Other moving averages, like the exponential moving average, is also used by some traders. The upper bandwhich is K standard deviations away from the moving average on the upside. The lower bandwhich is K standard deviations away from the moving average on the downside.

To make this concept clearer, take a look at the following graphic: The Squeeze When the bands come very close together, and the distance from the moving average becomes very small, it is called a squeeze. The Breakout A breakout occurs when the price closes outside the upper or lower band.

The following chart shows a fake breakout: Riding the Bands Another popular strategy based on Bollinger Bands, is riding the bands. If you have not done so, please check out The Most Detailed Article on EURUSD p.

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