- Bollinger Bands are placed over a price chart and consist of a moving average, together with upper and lower bands that define pricing channels.
- Bollinger Bands measure volatility for a currency pair.
- Volatility is the degree by which an exchange rate varies over time.
- Traders keep a close eye on volatility because a sudden increase in volatility levels is often the prelude to a market trend reversal.
- Bollinger Bands show relative volatility changes through the width of the bands themselves - the wider the bands, the greater the volatility.
- In the Bollinger Band example below, you can see that at the far left of the chart, the upper and lower bands are close together and are near the moving average line.
- However, just after the 15:00 mark, the bands start to widen when the rate begins to fall until it reaches a support level, at which point it begins to rise again.
- Note the widening of the bands, indicating that volatility remains greater than before the rate decline.
Upper and Lower Channels
- Bollinger Bands use standard deviation calculations to determine upper and lower boundaries together with a moving average.
- The spaces between the moving average and the boundaries are referred to as channels.
- The area above the moving average is referred to as the buy channel; the area below the moving average is known as the sell channel.
- When spot rates are in the buy channel, the exchange rate continues to advance at a faster rate than the moving average.
- Conversely, spot rates falling below the moving average are in the sell channel and are declining faster than the moving average.
- When you see the spot rate and the moving average converging, this is a sign that the current trend is weakening.
Standard deviation is a statistical unit of measure that describes the dispersal pattern of a data set. By definition, one standard deviation includes about 68% of all data points from the average, while two standard deviations include about 95% of all data points.
This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.