What are Bollinger Bands?

What are Bollinger Bands?

A poor craftsman blames his tools, that’s the saying right. Well with a trader, the number of tools available is insane, and so is the quality of the tools, so this saying becomes even more true than ever in the forex world. Today, the Indicator Series introduces yet another amazing tool frequently used by our professional traders on a day to day basis – the Bollinger Bands. Sounds cool, right? Now let’s get right to it!

What exactly are these bands?

Bollinger Band were first created by John Bollinger (well, not so much a surprise) and they are meant to measure a market’s volatility so we can find out the relative highs and lows in a dynamic market like forex. The indicator itself comprises of an upper band, lower band and a middle line, which is (lo-and-behold,) none other than the Moving Average line! Good to see a familiar name, right? Simply put, the bands actually tell us whether the market is quiet or loud. When the market is quiet, we see the bands contract and when the market is loud, they expand.

How are these bands formed?

It gets a little complicated here, so I will try my best to simplify it. Basically, as mentioned, the middle line is a simple moving average (SMA). The upper and lower bands, by default, represent two standard deviations above and below the SMA. By definition, standard deviation is a measure of the amount of variation or dispersion of a set values. Put into context here, the concept of standard deviation is a measure of how spread-out the prices are.

If the upper and lower bands are 1 standard deviation apart, approximately 68% of recent price movements are found within these limits. If the upper and lower bands are 2 standard deviations apart, then we are looking at around 95% of the current price movements being contained within these limits. 3 standard deviations, about 99.7% will be found within the bands. So, the higher the value of standard deviation you use, the more prices are captured in the bands!

How do we use this?

The Bollinger Bounce

As the name suggests, prices have a tendency to “bounce” and return to the middle of the bands.

This is a classic Bollinger Bounce. The reason bounces occur is because Bollinger bands basically act like versatile support and resistance levels. Most charting programs are set at a default of 20-period. The longer the timeframe you are in, the stronger these bands actually tend to be. This strategy is most useful when the market is ranging and there is no apparent trend. But do be mindful of the width of these bands. When the bands are expanding, it is preferable not to trade because it would imply that the prices are not going to be moving within a range, and instead they are likely to form a trend. If that’s the case, you might want to use this other strategy:

The Bollinger Squeeze

Once again, from the name, we know this involves the bands squeezing together. The Bollinger squeeze finds breakouts above or below the band, depending on trend, to be used as entry signs. If the candles start breaking out above the top band, the usual movement would be that it would continue to go up. Likewise, when the candles start breaking out below the bottom band, we would usually observe prices going down continuously.

This strategy allows us to catch a move as early as possible so many professional traders try to spot them but such direct setups aren’t that common. You can probably only spot them a couple of times a week on a 15-min chart. Nonetheless, it’s an extremely useful tool for traders.

If you are just starting trading, the Bollinger Bands is a pretty awesome indicator for you to try! In fact, many of our verified signal providers on Omada are very adept at using the various indicators for trading. Copy trading is an excellent way to start as you can use our traders’ proficient skills to reap some profits during your learning journey! So stop hesitating and come give us a shot!