Bollinger Bands (BB) are a volatility-based technical indicator that plots a price channel around a moving average using standard deviations to show expected price ranges, trend direction, and dynamic support/resistance levels in Forex and other markets.
Bollinger Bands resemble the Envelopes indicator but use standard deviations instead of fixed distances from the moving average, making the bands adapt to market volatility. The channel widens during uncertain price action for potential moves in any direction and narrows in stable trends to highlight direction.
Bollinger Bands IndicatorKey Features of Bollinger Bands for Traders
Traders value these characteristics:
- Sharp price breakouts often follow narrow bands, signaling reduced volatility and directional preparation.
- Strong price breaks beyond the bands indicate trend continuation.
- Price starting near one band usually reaches the opposite band.
Bollinger Bands Calculation Formula
The indicator has three lines.
ML = SUM [CLOSE, N]/N
1. Middle line (ML): Simple Moving Average (MA).
TL = ML + (D*StdDev)
2. Upper line (TL): Middle line plus D standard deviations.
BL = ML – (D*StdDev)
3. Lower line (BL): Middle line minus D standard deviations.
Where:
- SUM(…, N) — sum of price values over N periods;
- CLOSE — closing price of the bar;
- N — number of periods for calculation;
- SMA — simple moving average;
- SQRT — square root;
- StdDev — standard deviation:
StdDev = SQRT(SUM[(CLOSE – SMA(CLOSE, N))^2, N]/N)
FAQ
What do narrow Bollinger Bands signal?
Narrow bands indicate low volatility, often preceding sharp price breakouts as the market prepares for a directional move.
What happens when price breaks outside the bands?
A strong break beyond the bands typically signals trend continuation rather than reversal.
How are Bollinger Bands calculated?
They use a middle simple moving average with upper and lower bands set at two standard deviations, adjusting to volatility.
