Charts and indicatorsUpdated 2 min readBy the FXNOD team
Bollinger Bands explained: what the bands really show
Bollinger Bands are three lines: a 20-period simple moving average, and an upper and lower band set two standard deviations above and below it. The bands widen when the market is volatile and narrow when it is quiet. They show how unusual the current price is compared with recent prices. A touch of a band is not, by itself, a signal.
How they are built
| Line | Formula |
|---|---|
| Middle band | 20-period simple moving average |
| Upper band | Middle band plus 2 standard deviations of the last 20 closes |
| Lower band | Middle band minus 2 standard deviations of the last 20 closes |
What they tell you
- Width: wide bands mean high recent volatility, narrow bands low.
- The squeeze: very narrow bands often come before a larger move, with no hint of its direction.
- Position: a close near the upper band is high relative to the last 20 periods.
- Walking the band: in a strong trend the price can run along one band for a long time.
The common mistake
Selling every touch of the upper band and buying every touch of the lower one works in a range and fails badly in a trend, where the price hugs the band it is supposed to bounce from. Most closes fall inside the bands by construction. That is a description of the bands, not a reason to expect a reversal.
Two ways they are used
| Approach | Idea | Works when |
|---|---|---|
| Mean reversion | Fade moves to the outer bands back towards the middle | The market is ranging |
| Breakout | After a squeeze, trade the direction the price leaves | A trend begins |
With other tools
Bollinger Bands are often paired with RSI: a touch of the lower band with RSI turning up from a low reading is taken more seriously than either alone. Pairing two tools reduces the number of signals. It does not turn a lagging description into a forecast.
In FXNOD
Bollinger Bands can be drawn on Trade Pilot's chart and used as an indicator in Bot Forge. On a synthetic index they show the volatility the index was built to have, and nothing about the next tick.
Questions people ask
- What are the best Bollinger Bands settings?
- The standard is 20 periods and 2 standard deviations. Changing them changes how often the bands are touched, not how well they predict.
- What is a Bollinger Band squeeze?
- A period when the bands are unusually narrow, showing low volatility. A larger move often follows, in an unknown direction.
- Should I sell when the price touches the upper band?
- Not automatically. In an uptrend the price can stay at the upper band for a long time.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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