Bollinger Bands

Developed by John Bollinger, Bollinger Bands function as a type of price envelope, which define the upper and lower price range levels.

In particular, Bollinger Bands are plotted at a standard deviation level both above and below a simple moving average of the price.

Because the distance of the bands is based on standard deviation, these adjust to volatility swings in the underlying price.

How to Trade with Bollinger Bands

Bollinger Bands effectively utilize two parameters, i.e. Period and Standard Deviations.

The default values are 20 for period, and 2 for standard deviations, although you users can customize these combinations as they see fit.

Furthermore, Bollinger bands allow for traders to determine whether prices are high or low on a relative basis.

These are used in pairs, both upper and lower bands and in tandem with a moving average.

The pair of bands is not intended to be used on its own as it's important to use a currency pair to confirm signals given with other indicators.

Bollinger bands contract during periods of low volatility, which raises the likelihood of a sharp price move in either direction.

This could initially signal a trending move, however it is important to be mindful of false movements in the opposite direction that reverses before the proper trend begins.

When the bands separate by an unusual large amount, volatility increases and any existing trend may be ending.

Ultimately, prices can bounce within the bands' envelope, touching one band then moving to the other band.

Traders can use these swings to help identify potential profit targets.