Want to learn how to improve your forex trading? One of most popular indicators of Technical Analysis is the Bollinger Bands. It was developed in the 1980s and named after its inventors John Bollinger.

Bollinger Bands consist of:

• A middle band being an X-period Moving Average
• An upper band of N times the X-period Standard Deviation (SD) above the middle band
• A lower band at N times the X-period SD below the middle band

Typically we plot the Bollinger Bands on a 20-day period (X = 20) and width of 2 SDs (N = 2). As a default choice, the middle band is a Simple Moving Average (SMA) but sometimes an Exponential Moving Average (EMA) is used too.

What does it tell you?

Bollinger Band is an indicator of Volatility for the underlying currency pair. Statistically speaking, a 20-day period 1 SD Bollinger Band (also referred to as Bollinger Band (20,1) ) tell us there is a 68.27% chance that the price will stay within the upper and lower band in the next 20 days. Similarly, a 20-day period 2 SD Bollinger Band (or Bollinger Band (20,1) ) implies a 95.45% chance that the price will trade between the upper and lower bands in the next 20 days.

Narrow bands indicate low volatility, suggesting there will soon be a large price breakout or movements in the next 20-day period. Conversely, wide band indicate high volatility, suggesting that the chance of a large price movements is unlikely in the near term. (See chart below) In addition, the upper and lower bands also act as a strong area of resistance and support.

How to profit from it

Most traders buy when price touches the lower Bollinger Band, which implies it is oversold, and sell when price touches the moving average or the middle band. And short sells when price touches the high band (implies overbought) and buy it back when it touches the middle band. (See chart below) However, it is suggested that to use Bollinger Bands together with other technical indictors such as the Relative Strength Index (RSI) to determine the price trend before placing a trade.

I hope this post helps with your online forex trading. Stay tune, as we will cover more advanced trading techniques using Bollinger Bands.  If you want to trade like Forex Pro, then you must check out Forex Avenger - It’s by far the Best Forex Trading Course Online!

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