Bollinger bands are an important technical analysis tool. If you use them correctly, you can understand when to enter and when to leave the market and how the currencies will move, anticipating possible trend reversals, and more.
Bollinger bands are one of the most functional tools in the panorama of technical analysis indicators. They are one of the market volatility indicators and make it possible to identify above all the range of price fluctuations.
By using Bollinger bands, it is possible to invest and earn in forex as they offer to traders the opportunity to create a winning and above all effective strategy.
The bands are named after their creator, John Bollinger, an American financial analyst, who invented them based on a foundation by a researcher named John Hurst, who set “trading envelopes” around the current market price. These envelopes were calculated at a fixed rate (3% or 4%) developing important trading ideas marked precisely by the Bollinger bands.
In 1980 Bollinger became an independent financial trader and after that worked as a chief financial analyst for seven years. It is in this period that he begins to design the bands and other theories proposed in his books.
In 2005 he also won an important award for the great contribution he gave to technical analysis. Bollinger subsequently founded Bollinger Capital Management, an investment company that manages and invests money relying on technical analysis.
Bollinger bands was initially designed to measure market volatility, but then they assumed more interesting features. By combining Bollinger bands with other indicators, it is possible to observe the reversal of a trend and the best buy / sell moments.
Bollinger bands are formed by adding a moving average of 20 times the price of the analyzed instrument and its standard deviation.
The moving average represents the center line; the upper band is obtained from a linear moving average to which two times the standard deviation is added and the lower band is obtained from a linear moving average to which it is subtracted twice the standard deviation.
These curves are obtained exclusively from the historical currency prices of the currency pair. Overlaying the price curve at these three lines, it is possible to figure out how the price trend is over and to see the area where the prices are contained.
Traders should be careful when the price moves outside the band limits. If it moves upwards, there is an “overbought” situation and if it moves down there is an “oversold” situation. In the first case, the price went up too fast and it is advisable to open a sales position. In the second case the price fell too fast and it would be advisable to open a purchase position. In either case, the target must be positioned at the center line.
Also, to the presence of a very volatile session the bands expand, while at low volatility the bands contract.
When bands ‘squeeze’ there may be either a bullish trend situation (rising prices break the upper band) or a bearish trend (prices fall by breaking the bottom band).
Knowing how to control Bollinger bands is synonymous of an efficient trading strategy, but do not forget that a single technical analysis indicator does not allow you to have a complete view. We therefore suggest you to use it with other analysis tools.