What is a ‘Bollinger Band’?



What is a ‘Bollinger Band’?

A Bollinger Band is a type of indicator used to measure the volatility of a market. It was developed by a technical analysis, John Bollinger. The Bollinger Band is made up of a center line being either a SMA or an EMA and two bands or price channels, each running above and below it. The bands are the standard deviations of the asset being studied. It will expand when the markets are volatile and contract when confines in a tight trading or quiet.

The Bollinger Band is just an addition and a subtraction of a standard deviation calculation and not like a percentage calculation from a moving average. The standard deviation is a type of formula that measures volatility indicating how the price of an asset can vary from its actual value. By measuring the volatility of the price, the bands adapt themselves according to the market conditions. Because of this, traders find them very convenient and almost all of the required price data could be found between the two bands.

If you wish to know more about the Bollinger Band such as its calculations or set of 22 rules to follow, you can visit this link: www.bollingerbands.com.

The Bollinger Bounce

For a Bollinger Band, price always tend to move or bounce back to the center of the bands. The reason for these bounces is due to the Bollinger bands acting as a support and resistance levels.

These bands tends to be stronger when the time frame is stronger. Most traders have produced systems to capitalized on these bounces and it is best to apply this strategy when there is no apparent trend and the market is trending sideways (trending).

The Bollinger Squeeze

The Bollinger Bands

The Bollinger Bands

The Bollinger Squeeze is the main concept of the Bollinger Bands. A Bollinger squeeze is formed when the bands become narrow and compressing the moving average. A squeeze indicates a low volatility period and is treated by traders as a possible sign of a price breakout or high volatility and trading opportunities. The prices will resume to move up when they start to break out from the squeeze which is above the top band, and they will resume to move down from the squeeze which is below the lower band when they start to break out from below the lower band. The weekly GBP/USD chart on the right shows you an example of the bands squeezing together and later the price or the candle started to break out below the bottom band resulting in a downtrend.

Basically this is how a Bollinger Band works. By using the Bollinger Band alone as your trading indicator will not be enough or so effective. It is just an indicator developed to provide traders with data relating to price volatility. It would be of great advantage if you are to combine it with other non-correlated indicators such as the moving average divergence/convergence (MACD) or the relative strength index (RSI) that can give you more direct trade signals.