Bollinger Bands are a popular trading indicator used by traders to determine the volatility and potential price movement of an asset. They were developed by John Bollinger in the 1980s and have since become widely used by traders of all levels. If you haven’t heard of this indicator or do not know enough about it, you’ve come to the right place, because we are here to help.
What are Bollinger Bands?
Bollinger Bands consist of three lines that are plotted on a price chart. The first line is the middle band, a simple moving average of the asset’s price over a specified period. The second and third lines are the upper and lower bands, plotted a certain number of standard deviations away from the middle band.
The asset’s volatility determines the distance between the upper and lower bands. When the asset’s price is more volatile, the bands widen; when the price is less volatile, the bands narrow. This makes Bollinger Bands useful for measuring volatility and predicting potential price movements. If you work with a reputable and regulated brokerage brand like Main Group FX, you will have access to this tool (as well as others) on the platform.
How to Use Bollinger Bands
Bollinger Bands can be used in various ways, but their main purpose is to identify potential price reversals and breakouts.
When the asset’s price approaches the upper or lower band, it is considered overbought or oversold. This means the asset’s price may be due for a reversal and a potential trend change.
Traders can also use Bollinger Bands to identify potential breakouts. When the price moves outside of the bands, it is considered a breakout. This can indicate a potential trend continuation, and traders may use this as an entry signal to go long or short.
The popular CFD broker MainGroupFX notes that Bollinger Bands should be used with other technical indicators and fundamental analysis to confirm potential price movements.
Bollinger Band Strategies for Beginners
Here are some simple Bollinger Band strategies that beginners can use in their trading:
- Bollinger Band Squeeze Strategy
When the Bollinger Bands are narrow, the asset’s price consolidates and a breakout is imminent. Traders can use this as an entry signal to go long or short, depending on the direction of the breakout.
- Bollinger Band Breakout Strategy
When the asset’s price breaks out of the upper or lower band, it indicates a potential trend continuation. Traders can use this as an entry signal to go long or short, depending on the direction of the breakout.
- Bollinger Band Reversal Strategy
When the asset’s price reaches the upper or lower band, it indicates a potential price reversal. Traders can use this as an entry signal to go long or short, depending on the direction of the reversal.
Final Thoughts
Bollinger Bands are a useful tool for beginners to include in their trading strategies. They provide valuable information about an asset’s volatility and potential price movements. However, using Bollinger Bands with other technical indicators and fundamental analysis is important to confirm potential price movements. With practice and experience, traders can use Bollinger Bands to make informed trading decisions and improve their profitability.
