It’s time to take a look at Bollinger bands. And no, unfortunately, it’s nothing to do with champagne.

Bollinger bands are a technical analysis tool invented by John Bollinger. (Who also wrote the imaginatively titled book Bollinger on Bollinger Bands). Basically, they work by measuring the “highness” or “lowness” of a price, compared to previous trades.

They’re made up of a moving average with upper and lower bands based on standard deviations.

FOR EXAMPLE…

A common setting for a Bollinger band is a 20 period moving average with the upper and lower bands set at 2 standard deviations.

Why Use Standard Deviations?

Standard deviations can be used to gives you an idea of how much the price you are looking at varies from the average over a period of time.

In a totally random set of results, you would expect to see 95% of all results falling within 2 standard deviations, and more than 99% to be within 3. So applying this to trading, IF price is completely random, then there’s a very good chance that the next price the market makes will fall somewhere between the upper and lower Bollinger bands.

Of course, this all depends on price being random, and whether this is true or not is an argument for another day. However, even if price is not random, Bollinger bands are still useful to provide an indication of how far price is likely to move in a certain period.

How To Make Bollinger Bands Work For You

Bollinger bands can be applied to both trending and non-trending markets using a slightly different strategy for each environment. Let’s take a look at both, and the best ways to analyse them…

1. Trending Markets

In a trending market, price will be pushing in a particular direction, pushing on either the upper or lower Bollinger band, depending what direction it’s moving in.

This is shown in the chart below:

Bollinger bands

 

HOW TO DO IT:

In a trending market, the best way to use Bollinger bands is through the pull back strategy.

Bollinger bands can allow you to use a pull back towards the moving average to enter into the direction of the trend.

WHY IT’S USEFUL:

Using Bollinger bands in this way allows you to run tight stops, in order to capture the trend.

DON’T FORGET:

This works particularly well on lower time frames. When used with good risk/reward management, it can be a really good strategy for use on highly traded pairs (like the EURUSD).

2. Non-Trending Markets

In a non-trending market (also known as range bound or choppy), Bollinger bands can act as barriers to price, as shown in the chart:

Bollinger Bands

HOW TO DO IT:

In a range bound or low volatility environments, you need to use Bollinger bands as a guide to how the price may move. You can do this using the fading strategy.

To do this, you need to look for an extreme price movement in low volatility, and then take the opposite position. Then, plot the 20 period moving average, and the 2 and 3 standard deviations on the chart, as shown below:

The final step is to look for the price to hit the outer Bollinger, then move back into the Bollinger range. It if breaks or closes above the inner Bollinger, you can then get in the direction towards the moving average.

Here’s an example of what might happen:

Bollinger Bands

WHY IT’S USEFUL:

This strategy allows you to use relatively tights stops on lower time frames to capture a fade in the opposite direction.

DON’T FORGET:

To make sure you’re in a low volatility environment before using this strategy. (You can do this using ADX or an Awsome Oscilator, or get clues from your moving averages or MACD).

 

All comments, charts and analysis on this website are purely provided to demonstrate our own personal thoughts and views of the market and should in no way be treated as recommendations or advice. Please do not trade based solely on any information provided within this site, always do your own analysis.

Education feed

Editors’ Picks

EUR/USD loses 1.1800 amid escalaing US-Sino tensions

EUR/USD dips sub-18 after the US reported an increase of 1.763 million jobs in July, better than estimated but pointing to a deceleration. Escalating Sino-American tensions are boosting the dollar and fiscal talks are eyed. 

EUR/USD News

GBP/USD resumes decline, weighed by UK concerns, US-China conflict

GBP/USD trades at fresh weekly lows below 1.3050 as the dollar got a sudden boost from mounting tensions between the world's two largest economies. UK Chancellor Rishi Sunak said the furlough scheme that is underpinning the economy cannot last forever.

GBP/USD News

USD/JPY jumps toward 106.00 after NFP, retreats to 105.70

USD/JPY spiked to a fresh daily high with the initial reaction to US data. Nonfarm Payrolls in the US increased by 1,763,000 in July. US Dollar Index stays in the positive territory above 93.00.

USD/JPY News

Editors’ Picks

EUR/USD loses 1.1800 amid escalaing US-Sino tensions

EUR/USD dips sub-18 after the US reported an increase of 1.763 million jobs in July, better than estimated but pointing to a deceleration. Escalating Sino-American tensions are boosting the dollar and fiscal talks are eyed. 

EUR/USD News

GBP/USD resumes decline, weighed by UK concerns, US-China conflict

GBP/USD trades at fresh weekly lows below 1.3050 as the dollar got a sudden boost from mounting tensions between the world's two largest economies. UK Chancellor Rishi Sunak said the furlough scheme that is underpinning the economy cannot last forever.

GBP/USD News

USD/JPY jumps toward 106.00 after NFP, retreats to 105.70

USD/JPY spiked to a fresh daily high with the initial reaction to US data. Nonfarm Payrolls in the US increased by 1,763,000 in July. US Dollar Index stays in the positive territory above 93.00.

USD/JPY News

BTC/USD is on the verge of a massive breakout towards $10,000 or $8,000

Bitcoin has already lost a significant portion of its dominance against other altcoins. After trading sideways for such a long time, many coins are taking advantage of the situation to create massive rallies. 

Read more

XAU/USD drops $50 from record highs to the $2020 area

Gold prices are falling sharply on Friday, trading below $2040/oz at the moment. Earlier on Friday, the yellow metal reached at $2075, a new record high.

Gold News

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology