Bollinger Band Analysis & Bollinger Bands MT5 Indicator

Developed by John Bollinger

Bollinger Band are formed by three lines. Middle line is a MA - 20 period Simple MA.

The bands are then drawn at a distance away from the moving average These are the bands that form the lower & upper lines.

The distance where the bands are drawn is decided by another indicator known as the standard deviation. Standard deviation is a measure of volatility in the forex market or that of a currency pair.

Since the market volatility keeps on changing, the standard deviation will keep varying, and since Bollinger bands are drawn using the standard deviation the distance of the bands will keep on adjusting themselves to the market conditions.

When the markets become more volatile, the bands widen & they contract during less volatile periods.

The 3 Bands are designed to encompass the majority of a currency price action. The middle band forms the basis for the market trend, typically a 20-periods simple MA.

This band also serves as the base for the upper & lower bands. Upper band's & lower band's distance from the middle band is determined by volatility. Upper band is drawn at +2 standard deviations above the middle band while the lower band is drawn at -2 standard deviations below the middle band.

Technical Analysis and How to Generate Signals

• Bands provide a relative definition of high and low

• Used to identify periods of high & low volatility

• Used to identify periods when the prices are at extreme levels

Consolidation - the Squeeze

The bands tighten as volatility lessens, this identifies periods of consolidation. Sharp price breakouts tend to occur after the bands tighten.

Consolidation Pattern

Continuation Signal - the Bulge

If prices break through the upper or lower band move outside the bands a continuation of the current forex trend is expected.

Reversal Signals - Double Top and Double Bottoms Patterns

Bottoms and tops made outside the bands followed by bottoms & tops made inside the bands call for reversals in the trend

The Head Fake - Forex Whipsaw

Traders should be on the lookout for false breakouts known as whipsaw fakeouts or head fakes.

Price often breaks-out in one direction immediately following the Squeeze causing many traders to think the break out will continue in that direction, only to quickly reverse and make the true, more significant break out in opposite direction.

Traders acting quickly on the initial breakout often get caught on the wrong side of the forex price action, while those traders expecting a 'false breakout' can quickly close out their original position & enter a trade in direction of reversal. It is always good to combine Bollinger bands with other confirmation Indicators.