How to Use Bollinger Bands in Forex

Developed by technical analyst John Bollinger in the 1980s, Bollinger Bands identify the degree of real-time volatility for a currency pair. Traders keep a close eye on volatility because a sudden increase in volatility levels is often the prelude to a market trend reversal. Bollinger Bands are placed over a price chart and consist of a moving average together with upper and lower bands that define pricing "channels".

Bollinger was not the first to plot moving averages. Indeed, moderating the effect of rate fluctuations through a moving average calculation has long been a staple of technical analysis. However, Bollinger took the idea one step further by using the concept of standard deviations to add bands above and below the moving average line to define upper and lower rate boundaries. These boundaries form the pricing channels used to measure volatility.

In the previous lesson, we saw that a moving average based on the most recent spot rates "smoothes out" overall rate fluctuations. To review how moving averages are calculated, see Lesson 1 - Moving Averages for more information.