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Stocks & Commodities V. 10:2 (47-51): Using Bollinger Bands by John Bollinger Asking the market what is happening is always a better approach than telling ...
The standard deviation is then multiplied by a factor (typically 2). We calculate the upper band by adding the standard deviation multiplied by the factor to the moving average. We calculate the lower band by subtracting the standard deviation multiplied by the factor from the moving average.
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In our pro Forex trading course , you will learn how to use the Bollinger Bands ® to find and time entries step by step as well with one of our many setups which we teach and trade.
Bollinger Bands work best for analyzing sideways price action where price compresses prior to a sudden break out velocity move.
They are mainly used when determining when there are overbought or oversold levels. Selling when the price touches the upper band and buying when the price touches the lower band.
A common strategy is using Bollinger Bands to identify overbought or oversold market conditions. When the price of the asset breaks below the lower band of the Bollinger Bands, a trader may enter a long position expecting the price to revert back to the middle band. When the price breaks above the upper band, a trader can short the asset betting on a move back to the middle band. This type of strategy relies on the mean reversion of the price. Mean reversion assumes that if the price deviates substantially from the mean, it eventually reverts back to the mean price. Bollinger Bands identify asset prices that have deviated from the mean.
For this example we’ve got a CSV file with 6 months of hourly SPY data, covering Sep 3, 2013 – Feb 28, 2014. SPY is an ETF tracking S&P500 index. We have nearly 2000 data points in this file. The file contains OHCL price columns, volume, and timestamp column. Disclaimer: this file has been generated using IB Data Downloader .
Or if you want to focus on a few specific trading environments or tools, that’s cool too. It’s good to have a specialist when installing your electricity or plumbing in a house, just like it’s cool to be a Bollinger Band or Moving Average specialist.
The purpose of Bollinger Bands is to provide a relative definition of high and low prices of a market. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. 
A demo account is intended to familiarize you with the tools and features of our trading platforms and to facilitate the testing of trading strategies in a risk-free environment. Results achieved on the demo account are hypothetical and no representation is made that any account will or is likely to achieve actual profits or losses similar to those achieved in the demo account. Conditions in the demo account cannot always reasonably reflect all of the market conditions that may affect pricing and execution in a live trading environment.
Under such a condition, overbought or oversold, there is the highest chance of forming the reversal signals. Weak reversal signals usually take the price to the middle band again, and then the price follows the same course again. Therefore, strong continuation signals form close to the middle band when the market is trending.
Our simple Bollinger Band® strategy calls for a close below the lower band followed by an immediate buy the next day. The next trading day was not until December 26, which is the time when traders would enter their positions. This turned out to be an excellent trade. December 26 marked the last time Intel would trade below the lower band. From that day forward, Intel soared all the way past the upper Bollinger Band®. This is a textbook example of what the strategy is looking for.
In addition to using the Bollinger Bands with the default 20 period Simple Moving Average and the 2 Standard Deviations, I recommend you add a 200 period Simple Moving Average indicator. The 200 SMA will be used to set the trend direction. The trend will be determined by the position of the current price with respect to the 200 SMA. If price is below the 200 SMA, only take short positions. If price is above the 200 SMA, only take long positions.
Bollinger Bands are plotted at a standard deviation above and below a simple moving average of the price. The upper band is the moving average plus a standard deviation, and the lower band is the moving average less the standard deviation.
Scenario: buy at LOW_BB 5, sell at HIGH_BB 5. Additionally use STOCH_BUY_LEVEL 20 and STOCH_SELL_LEVEL 80 for confirming oversold/overbought conditions after the Bollinger Bands values have been met.
Volatility can generally be seen as a cycle. Typically periods of time with low volatility and steady or sideways prices (known as contraction ) are followed by period of expansion . Expansion is a period of time characterized by high volatility and moving prices. Periods of expansion are then generally followed by periods of contraction. It is a cycle in which traders can be better prepared to navigate by using Bollinger Bands because of the indicators ability to monitor ever changing volatility.
No magic number exists here either. Choose a setting that aligns with the techniques below, for the asset being traded. The attached chart shows a one-minute crude oil futures chart with Bollinger Bands. Trendlines have been drawn to show the trend direction based on Bollinger Band guidelines discussed below.