Bollinger Bands ® (BB)

Bollinger Bands are somehow similar to envelopes. The only difference is that the boundaries of the envelopes remain on a fixed percentage of the moving average, whereas the Bollinger Bands are plotted at a certain distance from the standard deviations. The standard deviation is an indicator to measure the volatility and thus the Bands adapt according to market moves. When the market becomes more volatile, the Bollinger Bands ranges’ expand, and vice versa narrowing with less volatile periods. BB is one of the main indicators used in FXLORDS’ Managed Forex Accounts.

Bollinger Bands are plotted on price charts, and shows how prices tend to stay between the upper and lower bands of the indicator. A distinctive feature of the indicator is that the distance between the upper and lower limits changes with price volatility. When substantial re-pricing happens in the market (i.e. high volatility), the distance between the two extremes expands, leaving plenty of room for prices to move within, in periods of slow markets, the distance becomes smaller between the two extremes to keep prices within its borders. Bollinger Bands’ most important characteristics can be summarized as follows:

1. Sudden changes in prices tend to occur after the distance between the two extremes narrows due to low volatility and liquidity.
2. If prices penetrated the upper limit, the continuity of the current trend is to be expected.
3. If tops or bottoms are formed outside the upper or lower boundaries of the indicator, a reversal in the trend is to be expected.
4. Price moves started from one of the boundaries of the indicator usually reaches the opposite one. These are useful in predicting prices.