Technical Analysis

Bollinger Bands

Introduction

www.cmsfx.comCreated by John Bollinger, the Bollinger Bands indicator serves as a measure of volatility. Overlaid with the price action, the indicator can give a large amount of information.

  • Periods of consolidation.
  • Periods when a currency is overextended.
  • Continuation signals.
  • Establishing price targets.
  • Buy and Sell signals.

The Bollinger Bands indicator is similar to the Moving Average Envelope indicator in that they both form upper and lower bands around a moving average. Bollinger Bands go a step further than MA Envelopes in that they incorporate statistics and the concept of standard deviations to form their upper and lower limits. Bollinger created his bands at a time when many analysts did not understand that volatility was a dynamic variable that fluctuated and not a static one (like pecentage based envelopes).

The indicator consists of three lines; the middle line (a moving average), the higher band and the lower band. An example of the indicator is depicted above in figure 1.

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