Currency Trading Charts: Using Bollinger Bands

Bollinger bands on currency trading charts are used just as on stock and options trading charts, as an indicator to alert the trader to a new forming movement, breakout or trend. They are made up of three lines or bands.

The central band is a simple moving average over a certain number of periods, typically 20. The upper and lower lines are at a certain number (usually 2) of standard deviations calculated with reference to the number of periods used for the center band.

Bollinger bands were invented by John Bollinger in the 1980s. The idea behind them is that prices will normally remain within 2 standard deviations of the mean, which here is the moving average used to plot the central line. This means that as prices reach the upper and lower band lines, a reversal is indicated to keep the prices within the bands.

They are also an indicator of volatility. Wider bands indicate a more volatile market than narrow bands.
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