Bollinger Bands are a technical analysis tool created by John Bollinger to provide a quick visual reference for volatility on a chart. Bollinger Bands are made of two lines drawn one standard deviation away from the moving average of a currency pair’s price action. The widening and narrowing of the bands around the price action (expansion and contraction) are a good indication of how much attention a currency pair is getting from the market.
Bollinger Bands are a useful tool in that they lend themselves to several different strategies. First, Bollinger Bands act like dynamic support and resistance, with the price action between them tending to revert to the mean. This means that if the bands are penetrated on the upside or downside, there is a good chance that the price action will return to the middle of the bands. Second, periods of really tight contraction are generally followed by expansion. This creates an opportunity to play the greater range for profits. And, like all tools, Bollinger Bands can be used as a confirmation tool in conjunction with other indicators.
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