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John Bollinger first conceptualized Bollinger Bands for evaluating the level of volatility in real time for currency pairs in financial markets, especially in foreign exchange markets. Fluctuations in currency pairs are calibrated by Bollinger Bands and indicate the degree of volatility of the same. Bollinger Bands are extrapolated or plotted on a price chart and comprise three distinct bands-the moving band in the middle, the upper, and the lower. Together they stand for pricing “channels” or “feeds”. Bollinger of course was not the pioneer in plotting a pricing band on a chart. The moving band had long been in vogue as an indicator of currency rate fluctuations. Bollinger fine-tuned this technical analysis tool by adding the upper and lower bands as indicators for upper and lower price extremities. Now, a review of these bands becomes imperative.
Bollinger Bands define the standard deviations
When you are dealing with Bollinger Bands, the need to understand the statistical technicalities for evaluating standard deviations can be dispensed with. One only needs to comprehend how standard deviations are instrumental in fixing price fluctuations of currency pairs’ vis-à-vis the moving average band and how the available data is harnessed for assessing selling and buying conduits in the chart. The region between the moving average band and the upper or lower line is known as channel. The region above the middle band is called a buy channel and the rates, spot rates to be specific are more than the moving average rates. On the contrary, the area between the lower line and the average moving line is known as sell channel and the spot rates in these regions signify falling exchange rates.
Bollinger Bands instability and rate turnaround signs
- Volatility or precariousness indicates the variations or fluctuations of exchange rare variations of currency pairs over specific time periods.
- Volatility is of crucial importance to forex traders and speculators as frequent variations in volatility levels indicate strong reversals in exchange rates. By correctly speculating reversal trends, traders expect to make a windfall.
- The comparative volatility is clearly shown by the extent of the width between the bands. Close bandwidth means less price fluctuations and spaced out bands signifies higher volatility or reversals.
Fixing the Bollinger Bands benchmarks
For evaluating price fluctuations and analyzing exchange rate fluctuations, you need to set the price chart represented by Bollinger Bands for a specific set of time periods or timeframes. This essentially means the present settings for the set of timeframes for evaluating the moving Bollinger line and the total number of standard divergence or deviations for upper and lower bands positioning. Most price charts are flexible in that they allow you to dabble with the settings. But bear in mind that ``20, 2`` is considered to be the perfect setting under all circumstances.
John Bollinger introduced or rather added the upper and lower bands to the existing band in forex price chart applications which came to be known as Bollinger Bands. Bollinger Bands exploit the statistical approach of standard deviations to formulate price channels that reflect trends and patterns in exchange rates of currency pairs. Bollinger Bands are extrapolated or superimposed over mini-max price charts, candlestick price charts, ask price, and offer price charts for evaluating market price and correcting rate reversals. The width between bands determines the relative volatility- the greater the width between the bands, the greater the volatility. The area between the upper band and the moving average band (the middle band) is called the buy channel and the region between the middle or the moving average band is known as the sell channel. When spot rates tend to hit the areas beyond the upper or the lower extremities, the tendency is known as “breaking the bands”.