Bollinger Bands

Bollinger Bands are a technical analysis tool invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades.

Bollinger Bands consist of:

• a middle band being a N-period simple moving average
• an upper band at K times a N-period standard deviation above the middle band
• a lower band at K times a N-period standard deviation below the middle band

Typical values for N and K are 20 and 2, respectively.

95% of price action will take place within the Bollinger bands and thus the Bands act as strong areas of support and resistance when the forex market is without trend. It is possible at times like this to successfully trade the price rising or falling from one Bollinger line to the other. When a trend begins and the volatility of the market increases thus the spacing of the Bollinger Bands will widen, as the trend slows down the Bollinger bands will narrow.

The use of Bollinger Bands varies wildly among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Moreover, the use of Bollinger Bands is not confined to stock traders; options traders, most notably implied volatility traders, often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock.

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