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Home » » Bollinger Bands Indicator: A Comprehensive Guide

Bollinger Bands Indicator: A Comprehensive Guide

What is the Bollinger Bands Indicator?

The Bollinger Bands indicator was developed by John Bollinger in the 1980s and is one of the most popular technical analysis tools in trading. It is used to measure market volatility and helps determine the direction of price trends as well as overbought (overbought) and oversold (oversold) conditions. This indicator consists of three lines plotted around the price of the traded asset:

  • Upper Band: The upper line
  • Middle Band: The middle line, which is the Simple Moving Average (SMA)
  • Lower Band: The lower line

How Do Bollinger Bands Work?

  1. Middle Band: Typically uses a 20-day period SMA, which serves as the centerline of the Bollinger Bands.
  2. Upper Band: Calculated by adding two times the standard deviation of the price to the Middle Band.
  3. Lower Band: Calculated by subtracting two times the standard deviation of the price from the Middle Band.

Bollinger Bands Formula:

  • Middle Band = 20-day SMA
  • Upper Band = 20-day SMA + (20-day price standard deviation × 2)
  • Lower Band = 20-day SMA – (20-day price standard deviation × 2)

How to Use Bollinger Bands

1. Reading Volatility:

  • High Volatility: The distance between the Upper Band and Lower Band widens, indicating the market is transitioning from a sideways condition to a stronger trend.
  • Low Volatility: The distance between the Upper Band and Lower Band narrows, signaling that the market might be moving towards a sideways condition after a strong trend.

2. Identifying Positions in a Sideways Market:

  • Buy Entry: When the price breaks above the Middle Band (SMA) and closes above it, target profits at the Upper Band.
  • Sell Entry: When the price breaks below the Middle Band and closes below it, target profits at the Lower Band.

3. Identifying Positions in a Trending Market:

  • Uptrend: Occurs when the price breaks above the Upper Band and the closing price is outside the band. Verify with the next bar to confirm the trend.
  • Downtrend: Occurs when the price breaks below the Lower Band and the closing price is outside the band. Verify with the next bar to confirm the trend.

How to Set Bollinger Bands in MetaTrader

  1. Open Trading Platform: Use MetaTrader 4 or MetaTrader 5.
  2. Select Indicator: Go to ‘Insert’ -> ‘Indicators’ -> ‘Trend’ -> ‘Bollinger Bands’.
  3. Set Parameters: Use the default parameters, i.e., a 20-day SMA and 2 standard deviations.

Benefits of the Bollinger Bands Indicator

  1. Measuring Volatility: The width of the bands reflects market volatility. A wider distance indicates higher volatility, while a narrower distance signals lower volatility.
  2. Identifying Entry and Exit Positions:
    • Sideways Market: Entry is based on a break above or below the Middle Band, with targets set at the nearest band.
    • Trending Market: Entry occurs when the price breaks above or below the band and closes outside it, with confirmation from the following bar.

By understanding how Bollinger Bands work and how to use them, you can enhance your market analysis and make more informed trading decisions. This indicator helps you identify market conditions and potential trend changes more effectively.

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