Every Indicator has a purpose, and thus it is very important to know the purpose of each indicator in forex. The Bollinger Band’s name comes from the developer’s name, and what it does is, it shows current market volatility changes, (The current currency pair’ movements) – and not only does it show the volatility change of the market, it confirms the direction.
The direction of the market is vital to notice, but the Bollinger has your back on that regard, and because the forex market is very volatile, this indicator, after confirming the direction of the market, it will warn you of possible continuation or break-out of the current trend of a particular currency pair.
It is important to know the features of the Bollinger Band indicator. In this regard – the Indicator consists of three (3) feature, of which are the moving averages, namely: Upper band, Middle Band, and Lower band.
The moving average is usually abbreviated (MA) – Having said that, the Upper Band shows the 20-day MA, displays as well, positive double standard price deviation. The Middle Band – displays 20-day MA as well as Lower band and shows a negative double standard price deviation.
The above features mentioned are lines indicated in a graph/chart. These lines have specific calculations, The Upper-Band which is the line at the top is calculated using the following formula: TL = ML + (D*StdDev)
In the following equation: TL = ML + (D*StdDev)
TL = Top Line
ML = Middle Line
D = Deviation (Higher)
The Middle Band which is the line in the middle of the graph/chart in forex in one of the MT platforms or a broker‘s bridge to the trading platforming is calculated using the following formula: ML = SUM[CLOSE, N]/N where ML is the Middle Line.
The Lower-Band which is the bottom line is usually abbreviated BL and is calculated using the following formula: BL = ML – (D*StdDev)
In the following equation: BL = ML – (D*StdDev)
BL = Bottom Line
ML = Middle Line
D = Deviation (Lower)
If the middle band and the lower band expand while volatility is increasing, suggests a trend in correlation with the direction of the middle line.
When volatility decreases, suggest sidewards movements in a range. If there are any prices outside the bands, it may indicate continuation if volatility increases or changes of direction if the initial movement is exhausted.
Please consider using indicators together – such as RSI, ADX or MACD for clearer judgment when placing an order.
Prices crossing the middle line may be used as a signal – either to buy or to sell respectively.