Bollinger bands were founded by John Bollinger in the 1980s and are used in Forex technical analysis, as a technical indicator that is used to compare a particular currency pair’s volatility with its relative price levels over a chosen time period. John Bollinger invented the technique of taking advantage of moving averages with two different bands. The two bands are used to both add and subtract calculations of standard deviations.
The technical indicator is comprised of two different trading bands that are both designed to specifically cover as much of the price action of a particular currency as possible, within the two trading bands.
Standard deviation, being a measuring mathematical formula, allows traders and investors using Bollinger bands in the Forex market to measure volatility. Standard deviation also allows traders and investors to see how the price of a particular currency pair can spread around the “genuine price” of it. When people use this technical indicator, they can be quite confident that all of the pricing data for the particular currency pair will indeed fall between the two different trading bands.
The Bollinger bands are actually comprised of one center-line and two separate price channels. The two separate price channels sit on either side of the center-line, one above and one below, quite simply. The center-line is known as a moving average, however more specifically, it is known as an exponential moving average. Both of the separate price channels are thought to be standard deviations of the chart that is being looked at and studied by the trader or investor.
When the price action for a particular currency pair is volatile, the Bollinger bands will expand. When the price action for a particular currency pair bears more of a tighter pattern of trading, the Bollinger bands will contract.
Some currency pairs can trade for longer time periods within the same trend, however there will often be times of volatility. In order for traders and investors to see trends more clearly, they will want to take advantage of moving averages so that they can filter the price action of a particular currency pair. This will allow traders and investors in the FX market to discover more information that could prove to be vital, in regards to discovering the overall trading pattern of the currency market.
The Forex market can be quite unsteady, unstable and unpredictable at times and especially at peak trading times during the day, despite the fact that the market can continue to trade in the same trend that is either up or downwards. Traders and investors who use technical analysis in the Forex market, can use support and resistance lines so that they can more confidently anticipate the price action of a particular currency pair, using moving averages. Lower support lines are drawn and upper resistance lines are drawn, before price channels are formed, through the drawing of statistical inferences. Traders and investors expect that, between these two newly formed price channels, the price action for the particular currency pair will rest.
In conclusion, Bollinger bands are used in Forex technical analysis as a technical indicator. They can be particularly effective if used correctly. You should also note that some traders and investors, prefer to draw straight lines that connect either the top of the prices or the bottom of the prices, so that they can notice the extremities of either the upper prices or the lower prices – some traders and investors like to draw lines for both the top and the bottom prices for particular currency pairs. Parallel lines can then be implemented, allowing that traders and investors to identify where prices will move within the channel – and if the prices do not escape the channel, the trader or investor can be somewhat confident that the prices are moving as predicted and expected. Every trader and investor in the FX market knows when using Bollinger bands though, that when the price of a particular currency pair touches or breaks through the upper band, it is seen to be over-bought – and vice versa, when the price of a particular currency pair touches or breaks through the lower band, it is seen to be over-sold. When a particular currency pair has been over-bought, you will most likely want to sell – and vice versa, when a particular currency pair has been over-sold, you will most likely want to buy.