Bollinger bands are a great trading indicator to use in your forex technical analysis and can help you in three ways to gain greater accuracy in your trading signals and increase profit potential. Let’s look at Bollinger bands in greater detail.

If you want to succeed in forex trading you need to be able to deal with volatility and the Bollinger band is an essential indicator to help you deal with it, turn it to your advantage and gain greater accuracy with your trading signals.

Bollinger bands will help you achieve the following in your forex trading strategy:

1. Help spot trend reversals

2. Spot trend changes

3. Time trading signals with greater accuracy.

Bollinger Bands Defined

Bollinger bands are volatility bands drawn around a simple moving average in the center giving you a total of three lines. Two outer bands and the inner moving average. The outer bands represent the standard deviation of price from the average mid band.

Moving averages are used to identify the underlying trend.

The distance between upper and lower Bollinger bands gives you the volatility of the market traded.

The greater the distance the upper and lower bands are the more volatile price of the market traded will be.

Bollinger Bands

In any market, traded the price rises slowly over the longer term. Prices may become volatile in short periods of time, but will normally come back to the longer term moving average - which is defined by the centre band.

The center band the "normal" value of the market traded that people are used to paying over time i.e it reflects the longer term trend.

The volatility of the outer bands shows how volatile prices are and how far away price is from "normal" value.

Short term price spikes historically away from the average and are normally caused by trader psychology and prices will return the mid band average.

Bollinger bands can therefore help with the following.

1. Spotting New Trends Developing

When a market makes trades in a narrow range, the Bollinger bands are also narrow and close to the central band this means volatility is low and when prices start to become more volatile a new strong trend and volatility are about to emerge.

When prices break above or below the upper or lower band, a signal is given that a trend is about to develop and a trader can position himself to enter the market on the break of the bands.

2. Timing Entry Levels

The Bollinger bands can when a trend is already in progress help you get into the trend with good risk / reward on a Price pullback.

A forex trader simply does this by looking for pullbacks to the center band (moving average) and then enters in the direction of the trend.

3. Market Turning points

When the price touches the top of the Bollinger band and starts to falter - a return to the middle band is likely, as prices have moved to quickly away from the average. On the other hand, when prices hit the bottom of the Bollinger band and momentum wanes a buy signal could be the right move.

Bollinger bands are an essential tool for warning of trending moves and they also help trader’s time entry into these trends with greater accuracy once they have developed.

Standard deviation is an essential concept for all traders to understand and deal with as volatility needs to be dealt with in any forex strategy and Bollinger bands help traders do this.

Using Bollinger Bands with Other Technical Indicators

Bollinger bands should NEVER be used to enter trading signals on their own - they need to be combined with other indicators to confirm trading signals.

Great indicators to combine with Bollinger bands are - RSI, ADX and the stochastic.

There is no better indicator for looking for potential set ups and when combined with momentum indicators such as those above, you have a powerful combination that can ensure greater timing accuracy on your forex charts and lead you to currency trading success.