Bollinger Bands – What They Are & How to Trade with Them

Bollinger Bands – What They Are & How to Trade with Them

What Are Bollinger Bands?

Bollinger Bands are a volatility-based technical indicator developed by John Bollinger. They consist of three lines:

1. Middle Band: A Simple Moving Average (SMA), typically a 20-period SMA.
2. Upper Band: The SMA plus two standard deviations (SMA + 2σ).
3. Lower Band: The SMA minus two standard deviations (SMA – 2σ).

Bollinger Bands expand and contract based on market volatility:

• Wider bands indicate high volatility.
• Narrower bands indicate low volatility.

Key Features of Bollinger Bands

• Measures market volatility dynamically.
• Identifies overbought and oversold conditions.
• Detects trend reversals and breakouts.

How to Use Bollinger Bands in Forex Trading

1. Bollinger Band Squeeze Strategy

A Bollinger Band Squeeze occurs when the bands contract, indicating low volatility and potential breakout.

• Buy Signal: When price breaks above the upper band after a squeeze.
• Sell Signal: When price breaks below the lower band after a squeeze.

2. Bollinger Bands Reversal Strategy

Bollinger Bands can indicate overbought and oversold conditions:

• Buy Signal: When price touches or breaks the lower band and then reverses upward.
• Sell Signal: When price touches or breaks the upper band and then reverses downward.

3. Bollinger Bands with RSI Strategy

Combining Bollinger Bands with the Relative Strength Index (RSI) can improve trade accuracy:

• Buy when: Price hits the lower Bollinger Band & RSI is below 30 (oversold).
• Sell when: Price hits the upper Bollinger Band & RSI is above 70 (overbought).

Pros and Cons of Using Bollinger Bands

✅ Pros:

• Great for volatility analysis.
• Works well in ranging and trending markets.
• Can be combined with other indicators for confirmation.

❌ Cons:

• Can give false signals in strong trends.
• Bands do not predict market direction—only volatility.

Final Thoughts

Bollinger Bands are a versatile tool for volatility measurement, trend detection, and trade setups. When used correctly, they help traders identify breakout opportunities and market reversals with high accuracy.