Bollinger Band Analysis and Bollinger Bands MetaTrader 5 Indicator

Developed by John Bollinger.

This indicator serves 3 primary functions:

• Provide a relative definition of high & low
• Show periods of high & low volatility
• Identify periods when prices are at extreme levels

Bollinger Band do this by using standard deviations as a measure of volatility. Since standard deviations indicator is a measure of volatility, the bands are self-adjusting: they widen during periods of higher volatility & contract during periods of lower volatility.

This MT5 indicator consist of 3 bands designed to encompass the majority of a instrument's price action. The middle band is a basis for the intermediate-term trend, typically a 20-periods simple MA, which also serves as the base for the upper and lower bands.

The upper band's & lower band's distance from the middle band is decided by volatility. Typically, the upper band is drawn +2 standard deviations above the middle band while the lower band is drawn -2 standard deviations below the middle band.

Interpretation

Bollingers are usually calculated using the instrument's prices & they have the following characteristics.

• Sharp price changes tend to occur after the bands tighten as volatility lessens, this is referred to as Bollinger band squeeze.

• When prices move outside the bands a continuation of the current trend is implied.

• Bottoms & tops made outside the bands followed by bottoms & tops made inside the Bollinger Band respectively, call for reversals in the market trend.

• A move which originates at one band tends to go all the way to the other band.

FX Trend Identification

This indicator is used as a trend following indicator since it shows the general direction of the market trend.

If the market trend is upward middle and the lower bollinger provide excellent points for opening a buy trade, these levels act as support levels.

In a down trend the middle and the upper bollinger provide excellent points for opening a sell trade. These levels are used as resistance zones.

The outer levels are also commonly used to set stop loss levels above or below these outer levels bands.