Bollinger Bands are indicators used in the analysis of Forex that were initially developed by John Bollinger during the 1980s. Bollinger Bands allow investors to know whether the price of a currency is high or low. The upper band is the standard for high prices while the lower band is for low prices.
Bollinger Bands use the measure of standard deviation, which is used to calculate the price differential around the “real price”. Bollinger Bands expand and contract as the current price pattern expands or shrinks dynamic figures to figures closed.
Many investors use them primarily to determine overbought levels and selling, selling when price touches the upper Bollinger Band and buying when it hits the lower Bollinger Band. In markets without trend, this technique works well, as prices travel between two bands as balls bouncing two walls.
The simple fact that the bands do not touch prices mean they are a signal for a position. The price can usually walk around the ends of the bands and get out. In these markets, investors who continually try to “sell at the top” or “buy the bottom” face an intense series of “stop-outs” (outputs loss) or worse, with a floating loss increasing as prices move further and further away from the original entry.
Maybe a smarter way to use Bollinger Bands is to use them to assess trends. To understand why Bollinger Bands can be a good tool for this task we first need to ask how.
Mainly, measure deviation Bollinger Bands. This is why they can be very useful in diagnosing trends. By generating two sets of Bollinger Bands – a group using the parameter “1 standard deviation” and the other using the typical configuration “2 standard deviations,” we can look at the prices of a whole new way.
Whenever the price moves between the upper Bollinger Band 1 SD and 2 SD away from the mean, the trend is up, therefore, we can define the channel as the “buy zone.” (White area)
On the contrary, if the price moves within the Bollinger Bands -1 SD and -2 SD, it is in the “zone of sale.”
Finally, if the price band wanders between 1 SD and -1 SD band, you are essentially in a neutral state and we can say is “no man’s land.”