Forex 103Lesson 7

Trading with Bollinger Bands

Bollinger Bands can be used in Forex analysis to determine whether a market is actively moving or if a market is lacking volatility. In other words, Bollinger Bands can be used to

determine how "loud" a market is.

The technical indicator signals market "loudness" by placing

3 lines (bands) on a chart. When these bands are tight, this

suggests that price is "quiet". When the bands widen, this

suggests that price is more active.

"Loud", active market

Below is an example of the Bollinger Bands being wide and price being very active..

"Quiet", slow market

Below is an example of the Bollinger Bands being tight

and price being not so active...

The Bollinger Band Squeeze

The main way that Bollinger Bands are used as part of a Forex trading strategy is by using the Bollinger Band squeeze. This method entails waiting for Bollinger Bands to become very

tight and then to trade in the direction of the first active and large candle. The screenshots

below demonstrate this...

Bollinger Bands are tightening

Candle closes against lower Bollinger Band, signaling

that price could move lower

Price is bearish and moves much lower

This method can also be traded when a candle closes against the upper band, in anticipation of a bullish move.

The Bollinger Band Bounce

Another way to use Bollinger Bands as part of a Forex trading strategy, is to use the Bollinger Band Bounce.

This method takes the approach that when price closes

at the upper band,price is likely to reverse back to the

centre band. When price closes at the lower band, price

is likely to reverse back to the centre band.

The example below demonstrates this. Do you notice

that every time a candle closes around the upper or

lower bands, price returns to the centre band?