Bollinger Bands

(BB)

Usage: Measuring Volatility | Evaluating Oversold/Overbought Markets

◙ Trading: Identify Reversals (entry/exit triggers) in any Timeframe

Standard Settings: 20 Periods SMA and 2 Standard Deviations

 

 Introduction to Bollinger Bands

The indicator was created by the money manager and researcher John Bollinger.

Bollinger Bands are two (2) volatility bands that are placed above and below a moving average. The Bollinger Bands can be used to measure volatility but also to evaluate the strength of the trend.

When the distance between the two bands widens then the volatility increases

When the distance between the two bands is getting narrow then volatility decreases

  Bollinger Bands Calculation:

Upper Band = 20-day SMA + (20-day Standard Deviation of Price x 2)

Middle Band = 20-day SMA (simple moving average)

Lower Band = 20-day SMA - (20-day Standard Deviation of Price x 2)

Calculating the %b {Default setting (5,1)}

■ %b = (Price ‐ Lower Band) / (Upper Band ‐ Lower Band)
 

Trading with the Bollinger Bands

The Bollinger Bands can be used for:

-Identify early signs of major reversals (historical entry/exit triggers)

-Identify the levels of potential intraday pullbacks

-Identify Oversold and Overbought Markets (the closer the price to lower band, the more oversold it is, the closer the price to the upper level, the more overbought it is)

-Pattern recognition (helps to recognize patterns such as double tops, head -and -shoulders, double bottoms)

-The effective timeframes include from 1-minute to several years

Bollinger Bands Squeeze

When the Bollinger Bands converge on the moving average, that is an indication of limited price volatility. This called the "Squeeze" and it is a reliable trading signal that works with forex trading.

Adjusting the Periods

The standard settings include a 20-Period SMA and 2 Standard Deviations.

  • For long-term periods: 50-period SMA and 2.1 standard deviation
  • For short-term: 10-period SMA and 1.9 standard deviation

 

Platform Setup

You can install 'Bollinger Bands' directly in MetaTrader-4 or MetaTrader-5:

□ GO TO → INDICATORS → TREND → BOLLINGER BANDS

□ STANDARD SETTINGS → 21-PERIOD SMA AND 2 STANDARD DEVIATIONS (What is Standard Deviation?)

□ RECOMMENDED SETTINGS:

  • NORMAL → 20-PERIOD SMA AND 2 STANDARD DEVIATIONS
  • LONGER-TERM → 50-PERIOD SMA AND 2.1 STANDARD DEVIATIONS
  • SHORTER-TERM → 10-PERIOD SMA AND 1.9 STANDARD DEVIATIONS

 

What are the Bollinger Bands?

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