Bollinger bands. Description, setup and use of Bollinger Bands

Bollinger bands are one of the indicators of the foreign exchange market "Forex", which appeared in the 80s. The tool became a real discovery, which transferred technical analysis to a higher level. The creator of the indicator was John Bollinger. The algorithm of the instrument is to determine the moment of undervaluation or overvaluation of the asset. Since the indicator refers to trend instruments, it helps determine the direction of the price movement. Due to the precise definition of areas of undervaluation and overvaluation, you can find the turning point of the traffic.

A bit of history

John Bolinger is a well-known trader of the modern world and concurrently serves as the founder of Bollinger Capital Management, which specializes in capital management. Bollinger Bands, and this is how the name of the indicator sounds in English, can be considered a real godsend for every trader. With the help of the situation analysis tool, you can clearly set goals, as it analyzes volatility in the market. The channel that forms around the moving average is flexible and constantly follows the price. All brokers, including Forexstart, offer Bollinger bands in the public domain. This tool is already built into the trading terminal, and its use does not need to pay extra.

Description of the tool

Bollinger bands are, in fact, three moving averages that are superimposed on the price chart, the indicator is not constructed in a separate window. The middle lines cover the movement of quotations on both sides, thereby creating a corridor of volatility. It was the appearance of the instrument that led to the appearance of its second name - "envelope". Moving averages are simple, with a standard deviation of +2 on the upper boundary and -2 on the lower border. The settings are basic, and, depending on the vehicle, each trader can upgrade them. In addition to the level of deviations, in the indicator settings you can change the period and shift. There is an option that indicates to which price the indicator is applied. The standard deviation value indicates the volatility of the trading instrument at a given time. With the growth of volatility, the Bollinger bands expand, the range between the extreme edges of the corridor increases. With a decrease in activity in the market, the corridor will narrow.

How does the change in the period affect the behavior of the indicator?

A period is a time interval corresponding to a certain number of candles, which is taken into account by the indicator when building a channel. In the standard settings, the value of 20. is provided. As it decreases, the channel lines become more broken. The price begins to pierce the boundaries, which leads to the appearance of a large number of false signals. The reaction of the lines themselves to the price movement is activated. Increasing the period results in smoothing the channel, increasing the distance between the top and bottom lines. The indicator begins to react slowly to a change in value. Due to the fact that the channels will be broken much less often, the number of trade signals will decrease. At the same time, the strength of the signals themselves becomes much greater.

What are the changes in the deviation indicators?

Deviation is an indicator that determines the distance of the upper and lower bounds from the central moving average. When the standard deviation is increased, the distance from the upper boundary to the center increases. The number of incoming signals decreases. Reducing the deviation brings the channel closer to the center, which leads to an increase in false trading signals. Experimenting with the standard deviation, you can choose the optimal parameters of the highs and lows, which should reach the price for a breakthrough.

Primary orientation and important points

Initially, the indicator was not created for the Forex market. Its main purpose was to analyze the situation on the stock market. Later, the tool began to be actively used in the currency market and implemented in the strategy of trading binary options. The author of the indicator used it on the daily chart. Hence the conclusion that the use of the indicator on other timeframes requires the installation of other parameters. The use of lines with volatile pairs with decreasing period will cause a huge number of false signals. Most professional traders do not recommend changing the standard deviation to a larger side. As practice has shown, in 90% of the situations the price remains within the corridor. Of the settings, the moving average period usually changes. All the rest is left with the standard values.

Features of the indicator

Binary options trading strategies, in fact, like most of the strategies adapted to the currency market, are developed on the basis of the features of this analysis tool. Especially neatly you need to monitor the periods of price exit for the extreme edges of the corridor. There is a high probability of two variants of the development of events. It is allowed as a continuation of the movement, and its turn. This signal must necessarily be supported by other tools of the trading system. In a number of situations (about 75%), if the active price movement began at one of the channel's faces, it will necessarily continue to the opposite side of the same channel. Another feature of the indicator is related to the situation when the minima and maxima are formed outside the channel. If the next candle takes place in the range of motion, you can consider the formation of the opposite signal. If the Bollinger lines are sharply narrowed and are in this state for a certain time, it is worth talking about the beginning of a new trend with a strong primary impulse. Subsequently, you can observe a strong jump in volatility. A doubtful feature is the prevention of the formation of more than 4 candles outside the corridor. After reaching the peak, the price begins to correct. This feature is not taken into account if important economic news takes place.

Practical use

Bollinger bands are classified as trend indicators. Their main goal is to determine the current direction of the market. According to theory, this tool is not designed to determine exact entry and exit points. In this case, many traders have found a very effective application of the indicator in the process of monitoring its operation. The simplest signal format is formed when the middle line is broken through in any direction. When breaking through the bottom-up direction, you can consider buying. The reverse situation indicates the preparation for sales. In addition to the priority entry point, Bollinger bands for binary options, for other types of markets help to set goals. As soon as quotations of prices reach the upper or lower border of the channel, depending on the direction of the trend, it is worthwhile to worry about closing trading positions.

One of the most aggressive strategies

Some aggressive traders also do not do without such tools as Bollinger bands. The strategy is based on opening deals in those moments when candles go beyond the limits of the channel. The danger of such solutions is connected with the fact that several falling or growing candles can form simultaneously outside the channel. Thus, until the time of the trend reversal, we will have to spend some time in losses. It is much more practical to build dynamic levels of support and resistance on the basis of indicator indicators . The accuracy of the boundaries remains at a sufficiently high level. The use of the tool is effective during a sharp narrowing of the corridor. Acting is by analogy with the use of the Alligator Bill Williams. The longer the corridor will be in a compressed state, the stronger will be the movement in the long run.

Independent and additional tool for trading

Bollinger lines can be used in trade both independently and as an additional tool for technical analysis. Effective is the combination of the latter with candlestick patterns (Price Action). It is actual to consider formations near the upper and lower boundaries of the channel. The simplest double signals can be pin bars or inverted candles, hammers, which will clearly indicate a trend reversal. Trade in the Bollinger bands can be effective when combining its signals with signals from the MACD indicator. Reduction or growth of the histogram with parallel growth of the curve of the channel lines is already a powerful signal. The presence of divergences or convergences can talk about the upcoming reversal of the trend. To open a deal at the most appropriate moment will allow a confirmation signal from Bollinger Bands.

Advantages of the technical analysis tool

Like any technical analysis tool, the John Bollinger bands have their positive and negative sides. Stop is on the strengths of the instrument. The main advantage of the latter is the ability to determine the trend as precisely as possible, which is one of the main criteria for successful trading on the market. This opens up opportunities for using the tool in any market situation. With the help of the tool, in addition to determining the trend, there is a chance to predict the areas and even the turning points of the traffic. To say more, focusing on the position of quotations in relation to the channel, you can objectively set goals. The versatility of the Bollinger Band indicator allows it to be used on all types of markets: currency markets, binary options market, stock market and stock market. The main thing is to adapt the settings for a specific time interval and take into account the activity of each trading instrument separately.

Disadvantages of the technical analysis tool

There are some drawbacks to such a tool of technical analysis, as Bollinger bands. "Forex" to analyze is very carefully, which determines the relevance of acquaintance with the errors of the "envelope". In connection with the subjectivity of the bands, they can be treated in completely different ways by different traders. We draw attention to the lack of universal settings, which could provide the supply of trading signals on different assets. Adaptation of the system is necessary for each of the formats of trade. Most of the signals from the indicator are false. It is extremely important to filter them with additional tools of technical analysis. According to the very creator of the channel, he works poorly on weak and inactive markets.

Strips in options trading

Lines or "envelopes" are often used by traders when trading options. Oscillating and simultaneously trend indicator reflects the actual deviation of the value of assets. The tool allows the trader to accurately determine whether the price of a trading instrument is high or low in comparison with average price indicators. This allows you to make a forecast for further growth or decline. The peculiarity that a trader who trades binary options should pay attention to is connected with the constant desire of the price to the average level.

Basic signals for a trader trading binary options

The main indicator signal, which should be looked at trading binary options - this is the maximum narrowing of the channel. This is a clear sign that in the near future it will be possible to observe a strong movement. If, after prolonged stagnation in the market, a bullish candle is formed, which breaks through the channel, it is possible to consider purchases more likely. The probability that the movement will go north is 90%. If the situation is reversed, and a bearish candle has formed on the chart, which broke through the lower border of the channel, it is better to give the advantage to sales. Any indicator signals should not be considered as the only true ones. Any formed pattern must have confirmation from either the other indicator, or the results of a fundamental or technical analysis.