Forex Trading Bollinger Bands
Bollinger Bands are Forex trading indicators that were first developed by John Bollinger during the 1980s. Bollinger bands enable traders to know if a currency price is high or low. The upper band is the criterion for high prices, while the lower band is for low prices. Traders can use this indicator to recognize different Forex trading patterns and it is also useful to incorporate the use of this indicator in Forex system trading.
Bollinger bands use the standard deviation measure, which is used to figure out the spread of prices around the "true price". Bollinger bands will expand and contract as the currency price pattern expands to dynamic figures or contracts to close figures.
There are five factors to notice about Forex trading Bollinger bands. These are set according to the currency prices:
- •The middle band measures the intermediate term trends, and is usually a moving average indicator, which is used as a base for calculation of the upper and lower Bollinger bands. The moving average that is used for the middle band is the 20-period simple moving average
- •The upper Bollinger band is calculated using the middle Bollinger band+2*20 period standard deviation.
- •The lower Bollinger band is calculated using the middle Bollinger band-2*20 period standard deviation.
- •Bandwidth is calculated using the following formula, measuring the width of the bands: Bandwidth = (Upper Bollinger Band - Lower Bollinger Band) / Middle Bollinger Band.
- •%b is a measure of the last price in relation to the bands. %b = (Last price- Lower Bollinger Band) / (Upper Bollinger Band - Lower Bollinger Band).
Paul Gatton, Technical Writer