CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Bollinger Bands, Concept and Use

Start investing today or test a free demo

Open real account Try demo Download mobile app Download mobile app

Bollinger bands, developed by John Bollinger in the 1980s, aim to create a dynamic view of market volatility, although at the time they were perceived as static. Let's take a look at some concepts to keep in mind and the different ways to use them.

Bollinger Bands Structure, Concept and Use

Bollinger bands are classified within the technical trend indicators and are composed of three bands (upper, middle and lower), which are drawn in relation to the fluctuations of the currency pairs.

The middle band is taken from the simple moving average of 20 periods (or any other time frame depending on the preferences of the trader).

The upper band is calculated in a somewhat more complex way, since the simple moving average is added twice (2x) the standard deviation of the 20-period moving average. Double the standard deviation is used for up to 68% more accurate results. This is considered to be the most appropriate signal, because the standard deviation (1x) of the 20-day SMA would cause an excess of signals to be sent, exposing the individual trader to a speculation scenario.

The lower band is calculated in exactly the same way, but instead of adding the 20-day SMA, it is subtracted.

Bollinger Bands, Concept and Use

Source: xStation

Please be aware that the presented data refers to the past performance data and as such is not a reliable indicator of future performance.

Signals Provided When Using Bollinger Bands

To understand more clearly how Bollinger bands can be interpreted as trading indicators, we will divide market movements into three subcategories:

  • market swing
  • uptrend movement
  • downtrend movement

 1. The swing of the market in the Bollinger bands

As can be seen in Figure 2 (chart 4H), the upper and lower Bollinger bands are considerably narrow. This should alert the trader that an uptrend is brewing and that they should be patient.The swing of the market in the Bollinger bands

Source: xStation

Please be aware that the presented data refers to the past performance data and as such is not a reliable indicator of future performance.

2. The upward trend of Bollinger bands

Continuing with Figure 2, we can see that the Bollinger bands provided a very clear buy signal when the price closed above the upper band (Point 1 in Figure 2). The trader should have made a gross profit greater than 180 when the TP triggered on September 28, 2013 and the price closed below the midline of the 20-day SMA. Had this gone the other way however, the trader would have made a loss.

3. The downtrend of the Bollinger bands

In Figure 3, presented below, we can see that the Bollinger bands offered a very clear sell signal when the price closed below the lower band (Point 1 in Figure 2). The trader should have made a gross profit above 120 when the TP triggered on October 7, 2013 and the price closed above the midline of the 20-day SMA. Had this gone the other way however, the trader would have made a loss.

The downtrend of the Bollinger bands

Source: xStation

Please be aware that the presented data refers to the past performance data and as such is not a reliable indicator of future performance.

Risk Management with Bollinger Bands

It is strongly recommended that the trader always has a good risk strategy in place, so that his or her account can be replenished after the first or second false signal.

Start investing today or test a free demo

Open real account Try demo Download mobile app Download mobile app

This content has been created by X-Trade Brokers Dom Maklerski S.A. This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.