Bollinger bands

Bollinger bands is an other very useful tool that helps you interpret whether price is high or low.

It was developed by John Bollinger in the 1980's. There are plenty of different systems and methods based on Bollinger bands, including this.

What are they?

Bollinger bands consist of three curves. Middle, lower and upper. The middle is often a simple moving average, often a SMA20. The upper and lower curves is calculated based on the middle curve and previous price movements. The distance between the middle curve and the upper and lower curves is the price's standard deviation. The curves are always called bands in the forex/stock-market, so that's is what we call them at this site as from now.

How to use them?

There are plenty of systems based on Bollinger bands, but the important thing is: Don't make you trading decisions solely from Bollinger bands. You have to use them together with other indicators or patterns.

If you decide to atach Bollinger bands in you chart application you have two important variables to play with, period and deviation. If you select for example period 20 and deviation 2, the price will be between the upper and lower bands +95% of the time. Interesting huh? See below:

See the above picture of EUR/USD 1H. The bands following price movements and traps price between the bands (almost) all the time. And you see that when price reaches the lower bands it oftens reverse back up, and when price reaches the upper bands it often reverses back down.

But you also see that sometimes price reaches the upper band but decides to contiue upwards, thats why you have to combine them with other tools.

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