Bollinger bands explained forex

Bollinger Bands

As the name suggests a technical analysts are of the same name going back there at the Bollinger bands to one of the most common indicators at all. The approach can be classified into a number of price bands in the 60 years which have their origin. The aim of all these approaches was to construct an indicator that should make the "true price trend" is visible and free the rate changes from insignificant fluctuations (keyword "market noise").

Following the development of technical analysis are trend lines and trend channels that basis be regarded as a forerunner of all price bands, also played an important role in the implementation of moving averages which plays in the bands associated with all course a crucial role. The latter statement is clear when one considers to be the granddaddy of all popular Envelopes rate band indicators, this is nothing more than two to a certain percentage of a moving average shifted around track lines. All approaches have in common the goal of the course during a high percentage of construction within the bands to "catch" (the prices move in the "normal" range), and - by extension - to make support and resistance levels visible.

Based on the known weaknesses of the approaches to date Bollinger wanted to create a course following system, which should include the volatility component. This he achieved by making full mathematical standard deviation in the concept-oriented and so the design of the straps on the data distribution. Specifically, he was doing this in such that he first constructed a simple moving average (now partly also find other types of average use) and then calculated the standard deviation on the share price. Illustrative of this is shown on how the values ​​fluctuate around their average. A large standard deviation indicates a volatile market, a low market value during a rather quiet. Could be "trapped" because of the simple standard deviation of only about 70 percent of the courses he opted for a multiplication by a factor of 2, which now holds 95 percent of all values ​​already within the Bollinger bands.


In the original concept of Bollinger find simple moving averages Duch (SMA) using closing prices of the period use. Both can be adjusted individually, instead of a simple exponential or even weighted averages are possible, instead of closing prices can also typical rate or weighted versions are used. For the typical price high, low and close are added and then divided by 3, the weighted average price of the closing price of a higher rank takes over with a certain multiplication factor (usually 2). Resulting in the formation of SMA (standard 20 periods) and thus a factor for multiplication (Standard 2) is concerned, it is noted that the user should make sure that the bands are basically as close as possible to the course events, a few openings exist and should be the center line more support line for the breakdown point. In addition to the aforementioned standard combination bands also often with the combination of 10 periods and 1.5 standard deviations or 50 periods and 2.5 standard deviations are chosen.

When you look at the actual significance of the Bollinger Bands is basically between trendsetting and trend-less distinct phases. In the case of a free market trend curve form the support and resistance bands. This is evident when you look at the chart that the course is one of the bands at errreichen to move back toward the other belt, so to speak between the two bands "jumps back and forth." During periods of strong market trend Bollinger recommends the use of supportive strength of a trend indicator, for example, or On Balance Volume Relative Strength Index. The combination of the two indicators is then ultimately responsible if it can be assumed with a break of bands starting from a trend or not. In the event that the trend strength indicator confirms the bands breakthrough can be observed that the center line often represents a support for corrections.

Another application of the concept is seen in the evaluation of top and bottom formations. As a buy or sell each setup, the configuration is defined outside of the first leg and second leg within the upper or lower Bollinger Bands. Finally, the indicator provides regarding the width of the tape, of course, a good indication of the prevailing volatility at a given time. While trend-less market phases narrow bands indicate a low level of market activity during a prolonged continuation of this situation can be speculated on a major move, but not its direction. Broad bands are indicative of strong fluctuations, however, as often observed at the beginning of consolidation. In the event of a lasting trend is also often identify a small bandwidth, identify specific signals are not here.