How to use Bollinger Bands

Bollinger lines are one of the most popular technical indicators in trading. They are also called stripes or ribbons. They are named after the name of a US analyst who first described them in 2001 in his book Bollinger on Bollinger Ribbons. By the way, together with his investment company the author was the first in the world 5 years earlier to launch an online Forex analysis project.


Views and meanings


The indicator looks like a line, with prices at the top and bottom of the moving average limiting the chart, but most often at a certain distance from it and occasionally intersecting with it. In a broad sense, they can be seen as support and resistance levels - this applies to both the extreme and central lines. At the same time, we should not forget that there are other support and resistance levels on the chart that are not related to the Bollinger bands.


The lane spacing depends on a certain number of standard deviations, which in turn are related to volatility. Thus, the width decreases with weak price fluctuations and increases with active chart movements.


One of the main rules of Bollinger lines is that only 5% of the time the price chart leaves their limits.


Today Bollinger lines are present in the trading terminal of almost any broker. For clarity, they can be applied over the price chart or opened in a separate window together with other technical analysis indicators.


Application in practice


Bollinger strips are extremely popular in technical analysis because of their clarity and ease of understanding. It is one of the first indicators that a novice trader is able to master and start using. So let's take a look at the main points that can help in Forex trading.


Approaching the upper and lower bands of the moving average signals a decrease in market volatility and vice versa. However, too much narrowing often tells the trader that he or she can prepare for the likely sharp jerk in the chart. In this scenario, it remains true to predict the direction of the subsequent price movement and you can make decent money on it. A long narrowing of the chart increases the probability of a strong jump.


If the price chart leaves the channel, this indicates that the trend is strong and that it is likely to continue.


When price peaks alternate inside and outside the bands, this signals a high probability that the existing trend will change.


When price reaches the upper or lower boundary, it assumes that in most cases it will reach the opposite boundary. Knowing this feature, many traders use it in their trading strategies.


For all the advantages of Bollinger bands, they should still be considered in combination with other indicators of technical analysis. It is better to look for confirmation of the signals given by the lines in other ways as well. Most importantly, remember that there are no guarantees in trading. The fact that a theory works in most cases does not mean that it will work in a particular situation.

18 November, 2020

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