Bollinger Bands

Bollinger bands are generated using a Moving average.  They are plotted above and below a moving average and show volatility in the market by widening and narrowing.  When the bands widen, it indicates an increase in volatility and when they narrow, a decrease in volatility is indicated.

They are typically calculated using a 20 day moving average in the following way

Middle band = 20 day SMA (simple moving average)

Upper band = 20 day SMA + (20 day standard deviation of price x2)

Lower band = 20 day SMA - (20 day standard deviation of price x2)

While you don’t need to understand the mathematics behind it, know that the use of the standard deviation means that the Bollinger bands contain around 88% of the price action.  As a result a price move outside the bands can be seen as significant.

When the market is ranging the bands will narrow and can be used as dynamic support or resistance levels as the price moves back towards the centre of the bands.

Whilethe bands can be used as dynamic support or resistance, just because the price touches the upper or lower band doesn’t mean the currency pair is over or under priced.  In fact it takes a lot of pressure to reach the bands and so breaking through the bands can often indicate a breakout.  When a breakout is about to happen, the bands will often squeeze together just before the candlestick breaks through one of the bands.  Once the break happens the bands will then widen.

Bollinger bands are definitely not to be used as a standalone indicator and should like most indicators be used in conjunction with other tools.

Within your MT4 demo account, Bollinger bands can be added to your chart by clicking the indicators button on the top navigation bar > Trends > Bollinger bands or you can simply double click “Bands” in the navigator window on the left.

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