Bollinger Bands (BB)

◙ Primary Use: Measuring Market Volatility | Spotting Oversold/Overbought Market Levels

◙ Trading: Identifying Trend Reversals (entry/exit triggers) | Recognizing trend strength and price compression

◙ Standard Settings: 20 Periods SMA and 2 Standard Deviations

 Introduction to Bollinger Bands

Created by renowned money manager and researcher John Bollinger, Bollinger Bands are a widely used technical indicator composed of three lines:

• A middle band (20-day SMA)

• An upper band: SMA + (2 × Standard Deviation)

• A lower band: SMA − (2 × Standard Deviation)

These bands dynamically adjust to market volatility:

• Wider bands = Increased volatility

• Narrower bands = Decreased volatility

  Bollinger Bands Calculation

Main Formulas:

• Upper Band = 20-day SMA + (20-day Std Dev × 2)

• Middle Band = 20-day SMA

• Lower Band = 20-day SMA − (20-day Std Dev × 2)

%b Indicator

• Measures where price is relative to the bands.

Formula:

• %b = (Price − Lower Band) / (Upper Band − Lower Band)

A %b value:

• Near 1 = Overbought zone

• Near 0 = Oversold zone

Trading with Bollinger Bands

These are the key use cases:

1. Spotting Trend Reversals

   • Historical entry/exit levels often align with band extremes

2. Pullback Detection

   • Intraday price dips toward the lower band can signal buying opportunities

3. Overbought/Oversold Conditions

   • Near Upper Band = Overbought

   • Near Lower Band = Oversold

4. Pattern Recognition

   • Helps validate patterns like:

     • Double Tops / Bottoms

     • Head and Shoulders

     • Breakouts & Failures

5. All Timeframes

   • Effective from 1-minute charts to multi-year trends

The Bollinger Band “Squeeze”

A Squeeze occurs when bands converge tightly around the moving average.

• Indicates low volatility

• Often precedes strong breakouts

• Highly valuable in forex trading

A sudden expansion after a squeeze often reveals the next directional move.

Platform Setup (MetaTrader 4/5)

To install Bollinger Bands:

→ INDICATORS → TREND → BOLLINGER BANDS

Recommended Settings:

• Normal: 20-Period SMA, 2 Standard Deviations

• Short-Term: 10-Period SMA, 1.9 Std Dev

• Long-Term: 50-Period SMA, 2.1 Std Dev

ℹ️ What is Standard Deviation? A statistical measure of price dispersion—larger deviations reflect higher volatility. (More about Standard Deviation)

Adjusting the Periods (Optional Settings)

 Adjust based on your asset's volatility and trading horizon.

■ What are the Bollinger Bands?

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