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Daily Market Analysis Daily Strategy Analysis (Live FxAlerts)Forex Indicators – Bollinger BandsMarcello Ducille’s Underground System DemonstrationQuestion & Answer Session

Introduction

Developed by John Bollinger, Bollinger Bands are volatility bands placed above and below a moving average based on the standard deviation. The bands automatically widen when volatility increases and narrow when volatility decreases. This dynamic nature of Bollinger Bands also means they can be useful on a variety of currency pairs and timeframes as they morph with the movement of price itself.

Courtesy of google images

Bollinger Bands as Indicators

Bollinger Bands are a versatile tool combining moving averages and standard deviations making it one of the more popular technical analysis tools available for traders. There are three basic components to the Bollinger Band indicator:

•Moving Average: By default, a 20-period simple moving average.

•Upper Band: The upper band is usually 2 standard deviations (calculated from 20-periods of closing data) above the moving average.

•Lower Band: The lower band is usually 2 standard deviations below the moving average.

Courtesy of google images

Bollinger Bands (in blue) are shown below in the chart of the E-mini S&P 500 Futures contract:

The Bollinger Bounce

Courtesy of Google images

One of the main concepts inherent to utilizing Bollinger Bands is that price is assumed to have a tendency to return to the middle of the bands. This is the prime concept behind the Bollinger bounce. By looking at the chart, can you tell us where the price might go next?

The Bollinger Bounce

The Bollinger Bounce

Courtesy of Google images

If you said down, then you are correct! As you can see, the price settled back down towards the middle of the bands.

What you just saw was a classic Bollinger bounce. The reason these bounces occur is because Bollinger bands act like dynamic support and resistance levels. The longer the time frame you are in, the stronger these bands tend to be. Many traders have developed systems that thrive on these bounces though this strategy is most popular for use when the market is ranging with no clear trend.

The Bollinger Bounce

The Bollinger Squeeze

Courtesy of Google images

The Bollinger squeeze is also pretty self-explanatory. When the bands squeeze together, it usually means that a breakout is getting ready to happen.

If the candles start to break out above the top band, then the move will usually continue to go up. If the candles start to break out below the lower band, then price will usually continue to go down.

Looking at the chart, you can see the bands squeezing together. The price has just started to break out of the top band. Based on this information, where might you predict price to go?

The Bollinger Bounce

The Bollinger Squeeze

Courtesy of Google images

If you said up, you are correct again! This is how a typical Bollinger squeeze pattern operates.

This indicator is designed for you to catch a move as early as possible. Setups like these generally don't occur every day, but one can probably spot them a few times a week, particularly if looking at a 15-minute chart.

The Bollinger Bounce

Closing Notes

There are many other things you can do with Bollinger bands, but these are the 2 most common strategies associated with them. This can be a great indicator for your trader toolbox, but as always remember that these general concepts are only concepts until they have been tried and tested in your overall trade plan to truly become a part of your system.

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