Bollinger bands are one of the trading indicators’ type, which is targeted to generate signals about the increase or the decline of volatility on Forex market. This indicator is developed for a trader to observe the tendencies on the market– whether it is calm or stormy.  If the market is even, the bands are converging, if the market starts to move, the bands are diverging.

Bollinger bands’ chart consists of three lines: in the middle – a simple moving average (SMA), higher is the upper band (SMA+2) and below is the lower band (SMA-2 standard derivations).

In order to calculate the indicator it is needed to compute a doubled divergence with the movement within a certain period of time, thereafter up- and downwards from the chart one plots the dots according to these calculations. In the result, there should appear a graph, resembling an envelope. The volatility ascend on the market will make the chart look diverging, and correspondingly, the lowering of volatility will be pictured as a converging envelope.

Bollinger bans are often used to recognize the moment when the price is ready to expand into a trend or, on the contrary, when a flat should be anticipated.

Bollinger bands have a few peculiarities from the analysis viewpoint. When prices start moving horizontally, and on Forex market there is no vivid trend, the bands are converging. When a new trend is forming, the bands are diverging. Thus, if the bands have been in the horizontal channel for a long term, a strong breakthrough should be projected resulting in a new trend.

Bollinger bands work well in combination with other types of charts. Though, taking a decision to open or close a position one should not consider signals of a single indicator. All your actions should be confirmed by numerous Forex indicators.

Bollinger bands are becoming more popular among other indicators; every trader using the technical analysis for his trading strategy, should know the way to employ it.

However, this indicator provides no precise signals for opening or closing positions on the basis of a price crossing the lines, but they can determine the borders, within which the price fluctuations can be analyzed by additional indicators. As a rule, together with Bollinger bands such indicators as the relative strength index, the MADC and Money Flow are used.

Added by Alexey Skachilov,
InstaForex Clients’ relationship manager