Bollinger bands represent another useful tool for trend determination. It’s no brainer that if prices decide to trend, they don’t move in a straight line, but deviate to the sides. Bollinger bands are designed to keep track the price’s deviation from the 20-period MA. This technical indicator divides the price action into three separate areas. If prices are located between the middle band and the upper one, they are in the buy zone. If a currency is trapped between the middle and the lower band, the prices are located in the selling zone. If prices are wandering within the middle area, they are in the “no man's land”. It means that they are trying to find the direction of the trend.
There is also another very interesting peculiarity of Bollinger bands. Sometimes we may observe the reoccurring squeezes on the chart. When the bands come closer to each other they tell us that we are trading in the non-volatile market and that a volatile period is looming on the horizon. In contrast, if the bands grow apart, it means that the volatility period phases out and it’s better to exit a trade.
Other articles in this section
- Moving Average
- Williams’ Percent Range (%R)
- Relative Vigor Index (RVI)
- Force index
- Bulls/Bears Power
- Average True Range
- How to trade on central bank decisions?
- CCI (Commodity Channel Index)
- Standard deviation
- Parabolic SAR
- RSI (Relative Strength Index)
- Trend indicators
- Introduction to technical indicators
- Support and resistance
- Technical analysis
- Central Banks: policy and effects
- Fundamental factors
- Fundamental analysis
- Fundamental vs technical analysis