How Bollinger Bands Forex Indicator Works
Bollinger Bands forex indicator calculations uses standard deviation to plot the bands, the default value used is 2.
Bollinger Bands Forex Calculation
The middle Bollinger band line is a simple moving average
The upper Bollinger band line is: Middle line + Standard Deviation
The lower Bollinger band line is: Middle line - Standard Deviation
Bollinger bands forex indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average and the bands are then overlaid on the forex chart price action.
Standard Deviation is a statistics concept. It originates from the notion of normal distribution. One standard deviation away from the mean either plus or minus, will enclose 67.5 % of all forex price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all forex price action movement.
This is why the Bollinger Bands forex indicator uses the standard deviation of 2 which will enclose 95 % of all forex price action. Only 5 % of forex chart price action will be outside the 3 forex bollinger bands, this is why forex traders open or close forex trades when price hits one of the outer Bollinger Bands.
The Bollinger Bands forex indicator main function is to measure forex price action volatility. What the Bollinger bands upper and lower limits try to do is to confine forex price action of up to 95 percent of the possible closing forex prices.
Bollinger Bands forex indicator compares the current closing price with the moving average of the closing price. The difference between these two forex prices is the volatility of the current forex price compared to the moving average. The forex price volatility will increase or decrease the standard deviation of the bollinger bands forex indicator.