Bollinger bands are one of the most popular technical analysis indicators. It was developed in the 1980s and was named after its inventors John Bollinger. Basically, it consists of how to read Bollinger bands and how to use Bollinger bands.
- A median band is a moving average of period X
- An upper band of N times the standard deviation of period X (SD) above the median band
- A lower band in N times the SD of period X below the median band
Typically, we plot the Bollinger bands over a period of 20 days (X = 20) and a width of 2 PD (N = 2). As a standard option, the middle band is a simple moving average (SMA), but sometimes an exponential moving average (EMA) is also used.
Bollinger bands explained in detail
The Bollinger band is an indicator of volatility for the underlying currency pair. Statistically speaking, a period of 20 days 1 SD Bollinger Band (also known as Bollinger Band (20.1)) tells us that there is a 68.27% chance that the price is in the high and low range in the Next 20 days. Likewise, a 20 day 2 SD Bollinger Band (or Bollinger Band (20.1)) period implies a 95.45% chance that the price will be traded between the upper and lower bands in the next 20 days.
Narrow bands indicate low volatility, suggesting that there will soon be a major price drop or movement in the next 20 days. On the other hand, broadband indicates high volatility, suggesting that the possibility of large price movements is unlikely in the short term.
Making profits with Bollinger bands
Most traders use Bollinger bands trading strategies and buy when the price reaches the lowest Bollinger range, implying that it is sold in excess, and sells when the price reaches the moving average or the mid-range. And the shorts sell when the price hits the high band (implies an overbought) and the redemption when the middle band touches.