Section VIII: Bollinger Bands (BB)
Indicator was developed by John Bollinger. This indicator consists of three different components:
- A simple moving average in the middle
- An upper band, which is calculated by adding 2 standard deviations to the middle MA
- A lower band, which is calculated by subtracting 2 standard deviations to the middle MA.
The principal objective of this indicator is to measure the volatility at any given moment relative to historical volatility of any given currency pair.
Bollinger Bands Usage
Usage No 1 – Volatility. When the upper and lower bands expand it indicates more volatility relative to previous periods. When the bands get narrower it indicates the volatility at the moment is lower than the volatility of previous periods.
Usage No 2 - Bands as support and resistance. Sometimes the extreme bands can act as important support and resistance levels.
Thus, we can take trades as the price bounces off the bands, as prices break out the bands, etc. This type of trading is recommended on pullbacks or retracements and during trendless conditions (to scalp). Of course, with the help of other technical indicators the signals will increase theiraccuracy.
The signals that are taken in direction of the trend offer much better accuracy than those taken against the trend.
The psychology behind this signal is that most of the time the market will be inside both bands. When the market reaches either band, it will tend to retrace or switch directions to the other side as “it has reached its normal deviation”.