Bollinger Bands is a technical indicator that is specialized to help traders in a ranging market. Find out how to read the signals in this article.

One technical indicator that can be used by any kind of trader at ranging markets, be they scalper, day trader, or swing trader, is Bollinger Bands. Developed by John Bollinger, Bollinger Bands is an almost perfect indicator in the ranging market due to its dynamic bands that follow the price movement as ideal support and resistance, from which traders can look for opportunities to enter buy and sell trades on price reversals around the bands.

To get more familiar with Bollinger Bands, let's dive into the following section.

Bollinger Bands Guide

 

Bollinger The Magic Bands

Bollinger Bands consist of two bands that stand an equal distance from each other; an upper and a lower band that was constructed based on the addition and subtraction of Simple Moving Average (SMA) value with a certain standard deviation.

As is common among popular technical indicators, Bollinger Bands is featured in Metatrader as well and it is very easy to set it up. The default setting is usually placed at SMA-20 with a standard deviation of 2.

Bollinger Bands have the unique ability to move in accordance with market condition changes in any time frame, effectively showing us when the market is especially busy and when it is relatively calmer by the width of the bands' distances.

Bollinger Bands

Prices have the tendency to bounce back to the center of the bands. After candles that indicate price movements touch the upper band of the Bollinger Bands, prices most likely will be pulled back down, and vice versa.

Bollinger Bands act like dynamic support and resistance levels. Consequently, as opposed to the Moving Averages that are good at trending market, Bollinger Bands are especially good at ranging market. Therefore, Bollinger Bands tend to fail if applied without the support of trend indicators.

 

Bollinger Bands Entry Points

Bollinger Bands makes it possible for traders to enter the market at varying entry points. You could buy when the price touches the lower band and sell when it comes near the upper band (depicted on the chart below as red circles). Alternatively, you could buy or sell after the price crosses the center line and target the next band (yellow circles).

Bollinger Bands Entries
You could also target corrections that might happen following an oversold or overbought. Oversold is when the price touches the lower band, but it is still higher than the band. When oversold happens, open a long position and close at the center line or the upper band.

On the other side, overbought is when the price touches the upper band but it is still lower than the band. Following an overbought on Bollinger Bands, open short position.

It sounds easy, doesn't it? Additionally, you could also use Bollinger Bands in conjunction with other complimentary indicators, such as Moving Average and MACD to support you when the market is trending.

 

Bollinger Squeeze

One thing that needs to be remembered, however, is that when the bands narrowed considerably as shown in the picture below, it signals upcoming big movement, either up or down, in line with previous moves or in the opposite direction. When the bands tighten and some candles then close outside the upper band, then the price most probably will fly upward. As such, if the bands tighten and candles close below the lower band, the price is most likely to fall sharply.

Bollinger Bands Squeeze
This tightening analysis is called Bollinger Squeeze. It could occur up to several times a week, although especially significant movement might happen every now and then. I personally would be particularly cautious when Bollinger Bands on major currency pairs are narrowing so close they almost kiss each other, as it most likely precedes unexpectedly big and significant movement.

 

How to Apply Bollinger Bands on MetaTrader

If you use MetaTrader, Bollinger Bands is available as one of the default indicators so you could just choose it from the platform's indicator selection. Here are the simple steps:

Bollinger Bands MetaTrader

  1. Open the MetaTrader platform.
  2. Click on the Insert menu, then choose Indicators.
  3. Pick Trend and click on Bollinger Bands.
  4. Set the parameters or you could leave them by default, then click OK.
  5. All done, you could use Bollinger Bands to analyze the market now.

All in all, Bollinger Bands is one of the easiest indicators to be used and is particularly efficient for scalpers if it is being placed on a 15M time frame. More importantly, it is an indicator that is specialized for ranging markets. It might fail in the trending market so it is going to need the support of trend indicators. Alternatively, Bollinger Bands could also be used to complement trend-based indicators when the market is ranging.