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Bollinger Bands

 

Bollinger Bands Purpose


Bollinger Bands is one of the most important technical tools that displaying the changes of current market volatility and it was named after its inventor John Bollinger in the early 1980s. A trader can use Bollinger Bands as a very accurate and exact indicator in any time frame. This tool has much utilization and provides traders extremely profitable signals for market entrance and exit.
The major signals from Bollinger Bands are the following three:

  • The squeeze
  • The expansion
  • 2.0 STDV close

Bollinger Bands Usage


>Bollinger Bands is one of the greatest tools that help the perceptive FX trader with his entries and exits in the market. The effect of a higher/lower band to approaching price provides to active trader with a sign of what will probably take place over the next few bars or more. Also, this reaction provides valuable insight into whether or not this will be just a small bars or enough a few bars.

Bollinger Bands indicator consists of the three moving averages:

  • Upper band - 20-day simple moving average (SMA) plus double standard price deviation.
  • Middle band - 20-day SMA.
  • Lower band - 20-day SMA minus double standard price deviation.

The growing distance between the Upper and the Lower bands, while volatility is increasing, recommends of a price developing in a trend which tendency associates with the direction of the Middle line.

Bollinger Bands offers about 3-4 obvious and precise entry signals. Combining these Bollinger band signals with some solid price action techniques they can all develop into perfect entry activates. In any case the price crossing of the Middle lines from below or above can be understood as a signal for buying or selling.



Bollinger Bands Calculation


Bollinger Bands are formed by three lines:

  • The middle line (ML) is a usual Moving Average.

ML = SUM [CLOSE, N]/N

  • The top line (TL) is ML a deviation (D) higher:

TL = ML + (D*StdDev)

  • The bottom line (BL) is ML a deviation (D) lower.

BL = ML — (D*StdDev)


Where:


N — number of periods used in calculation;
SMA — Simple Moving Average;
StdDev — Standard Deviation.

 

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