Lesson 2: Bollinger Bands

Forex Training Summary and Quiz

Bollinger Bands in Forex

  • Bollinger Bands were introduced in the 1980s by technical analyst John Bollinger.
  • Bollinger Bands make use of a moving average and the statistical concept of standard deviations to create bands or "price channels" that show the strength of a market trend as well as overall trade volatility.
  • Bollinger Bands must be placed over a pricing chart such as an Asking Price, a Minimum / Maximum Price Chart, or a Candlestick Chart. This provides the current market price, as well as a moving average price that "smoothes out" rate fluctuations.
  • The greater the distance between the bands, the greater the overall exchange rate volatility.
  • The region between the average rate and the upper band is the buy channel - the region between the average rate and the lower band is the sell channel.
  • A series of spot rates falling outside either of the bands is said to be breaking the bands and is a strong trend reversal signal.
  • Double Top - a trend reversal signal that the market is resisting further price increases and a sell-off is likely as traders settle their open positions prior to an anticipated pullback in the exchange rate.
  • Double Bottom - a trend reversal signal that the market is supporting the current rate suggesting that rates could increase as buyers enter the market.

  • Putting It All Together
Bollinger Bands provide insight into the level of _________ for a currency pair.
relative strength
volume
volatility
risk
Bollinger Bands use the concept of standard deviations to measure the _________ of a data set.
effectiveness
size
depth of market
dispersal pattern
The area between the moving average line and each band is called a _________.
target
channel
trough
resistance point
When spot rates fall outside the bands ("breaking the bands"), this indicates a(n) _________ in volatility.
leveling out
increase
easing
decrease
As the bands widen, this is an indication of _________ volatility.
a decline in
weaker
straight-line
greater
Volatility tends to _________ following a rate reversal as traders wait for a clear signal as to the market direction.
decrease
increase
remain constant
cease
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