In this article, we are going to take a closer look at a interesting tech analysis indicator called the Bollinger Bands. Any seasoned trader out there has probably applied this indicator to analysing the price chart in order to make a sound trading decision.
The Bollinger Bands indicator was created by John Bollinger. It measures the market volatility and provides useful information about the market:
- trend reversal or not
- consolidation periods
- high volatility periods
- probable market highs and lows
The indicator consists of 3 bands, which revolve around a central moving average (SMA), with 20 as the default value. 85% of the time, the price can be found withing the following bounds:
The lower band - SMA with minus 2 standard deviations
The upper band - SMA with plus 2 standard deviations
The standards settings in MetaTrader 4 are 20.2.
As the market volatility grows, the bands start expanding away from the central SMA. On the contrary, of the volatility shrinks, the bands shrink with it.
For any trader involved in tech analysis, trading close to the outer Bollinger Bands adds certainty to the supposition that there is some kind of support or resistance depending on the specific band.
However, you should keep in mind that the indicator inself cannot guarantee buy or sell signals. It only shows that the market is getting overbought or oversold.
