Forex Technical Analysis Articles - Volatility Indicators - Bollinger Bands

Technical Analysis

1. Introduction

2. Construction

3. Interpretation of Bands

4. Squeezes and Bulges

5. Price Action in a Trending Market

6. Price Targets in Ranging Markets

7. Double Bottom

8. Double Top

9. Conclusion

Created by John Bollinger, the Bollinger Bands indicator serves as a measure of volatility. Overlaid with the price action, the indicator can give a large amount of information.

Periods of consolidation.

Periods when a currency is overextended.

Continuation signals.

Establishing price targets.

Buy and Sell signals.

The Bollinger Bands indicator is similar to the Moving Average Envelope indicator in that they both form upper and lower bands around a moving average. Bollinger Bands go a step further than MA Envelopes in that they incorporate statistics and the concept of standard deviations to form their upper and lower limits. Bollinger created his bands at a time when many analysts did not understand that volatility was a dynamic variable that fluctuated and not a static one (like pecentage based envelopes).

Figure 1 – Example of the Bollinger Bands indicator using EUR/USD pair.

The indicator consists of three lines; the middle line (a moving average), the higher band and the lower band. An example of the indicator is depicted above in figure 1.

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Table of Contents

1. Introduction
The Bollinger Bands indicator measures volatility of price action. It has a multiple of uses for a trader using technical trader.

2. Construction
The concept of Standard Deviation is the backbone of this indicator. The formula for constructing the middle, upper and lower bands is presented.

3. Interpretation of Bands
The basic interpretation of the bands is to tell whether volatility is at a high or low level. Volatility increases when the market makes significant moves, such as reversals.

4. Squeezes and Bulges
When volatility is low, the market is consolidating, and is then likely to breakout from its most recent trading range. Bulges of the bands may indicate that a reversal is approaching.

5. Price Action in a Trending Market
Bollinger Bands are a good visual way to identify and analyze trending markets.

6. Price Targets in Ranging Markets
Bollinger Bands can serve to identify overbought/oversold levels and can be used to identify possible price targets.

7. Double Bottom
During a double bottom, price touches the bottom band twice, in a show that it is bouncing of support. A double top pattern is indicitive of possible reversal..

8. Double Top
During a double top, price touches the upper band twice, in a show that price action is ready to reverse. This pattern shows a show of resistance that price is unable to penetrate.

9. Conclusion
The main points and interpretations of this indicator are summarized in the conclusion.