Bollinger bands are a type of Forex indicator that you can use to help make trading decisions. They are named after the famous Forex chart analyzer, Horatio P. Bollinger. Not really, but it sounded cool, right? While the history of this indicator is not necessarily that important, the indicator itself can come in handy when Forex trading. Here are the basics of this tool and how you can use it to be successful.
Finding the Bands
To equip this indicator, you'll need to open up your Metatrader platform and then open a currency pair chart.
After you do this, go up to "Insert" followed by "Indicators" then "Trend" and then "Bollinger Bands."
Once you select it you'll be shown a box with some options. You can simply click on "Ok" to put the bands on your chart or you can change some of the options, depending on your strategy.
What They Mean
When you look at a chart with this indicator on it, you will notice a series of three lines moving along with the price. The upper line represents an upper limit for the market while the lower one represents a low point for the market. The middle line is a type of mid point or average for the market.
When the bands are far apart, it usually means that the market is volatile and has a lot of action going on. When the bands are close together, it means that not much is going on and the market is quiet.
The "Bollinger bounce" is a scenario that often plays out with this indicator. When looking at the chart, you'll notice that the price tends to bounce back and forth between the upper and lower lines frequently. This means that the lines act as a type of dynamic support and resistance for you to use. This usually happens when the lines are not close together. This means if the price touches the top line, you can feel fairly confident that it will bounce back towards the bottom.
The squeeze is another phenomenon that regularly occurs with this indicator. When you see that lines the close together, it can often be an indicator that the market is about to break out in one particular direction. After the lines squeeze together, watch for the price to break through one of the lines. Once this happens, it will usually go for a big move before settling back down again.