Trader Lab · Technical analysis
FxPro. Japan
How to use Bollinger Bands
Bollinger Bands draw lines above and below a moving average based on how widely prices vary (the standard deviation). Fading touches of the outer band is the famous use, but the bands also show how strong a trend is.
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How the bands are built
The middle line is a 20-period simple moving average. Bands sit at 1, 2 and 3 standard deviations (sigma) above and below it. The more prices vary, the wider the bands.
Textbook statistics say about 95% of values fall inside 2 sigma. Market prices do not follow the textbook distribution, so do not assume price rarely leaves the 2-sigma band.
Squeeze and expansion
When the bands narrow sharply, volatility is low and the market is coiling: a squeeze. A sudden widening afterwards marks the start of a bigger move. During a squeeze the direction is unknown; wait for the breakout.
Watch for band walks
In strong trends price can ride the upper 2-sigma band for many bars. Selling every touch of the band in that phase leads to stop after stop. While the bands widen and price hugs the line, do not fade it.
When fading works better
- The bands are roughly parallel and the middle line is flat: a range.
- Price touches the 2-sigma band and a reversal candle forms.
- Exit plan is set first: target the middle line, stop beyond 3 sigma.
Reversal candles: how to read candlesticks.
%b puts a number on position
%b shows where price sits inside the bands: 0 on the lower band, 1 on the upper band, 0.5 on the middle line, above 1 outside the upper band. It is handy for comparing several pairs on the same scale.
Setting them up in MT4 or MT5
- Insert, Indicators, Trend, Bollinger Bands.
- Period 20 and deviation 2 are the defaults; add copies with deviation 1 or 3 if you want those bands too.
Questions
Should I watch the 2-sigma or 3-sigma band?
Start with 2 sigma. Price rarely reaches 3 sigma, so that band is used more as a stop or profit-taking guide.
Can I change the 20 period?
You can, but 20 is the recommended default and the one most traders use. Test any change on the same pair and timeframe first.
Can I trade on Bollinger Bands alone?
Hard to, because the right use flips between ranges and trends. Combine them with the slope of a moving average and candles to judge the market state first.