Lesson 2: Bollinger Bands

Setting Bollinger Bands Parameters

Overview

  • In the following chart, note the "20,2" in the top left corner.


Bollinger Bands parameter settings
Bollinger Parameter Settings
  • This represents the current settings for the number of time periods used to calculate the moving average, and the number of standard deviations away from the moving average to position the upper and lower bands.
  • In this example, the past twenty reporting periods of pricing information are used to calculate the moving average, while the upper and lower bands are set to two standard deviations away from the moving average.
  • Most charting applications allow you to change these settings and you can experiment with other settings but keep the following in mind:
    1. You want to keep most of the exchange rate fluctuations within the bands – if spot rates break through the bands too frequently, it becomes impossible for you to distinguish between a typical fluctuation and a possible reversal signal.

    2. Conversely, if market rates rarely break the bands, consider reducing the number of reporting periods for which the average rate is calculated.

  • Note that John Bollinger himself believed "20,2" to be the optimal setting for most situations.
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