Bollinger bands are one of our favorite indicators for forex trading. The chart above shows Bollinger bands. It contains 3 different bands, a lower band, an upper band, and a middle band. The chart below shows how to add the Bollinger band indicator in the meta trader platform.
There are a few important parameters to choose from for the Bollinger band indicator, these are the period, shift, and standard deviation as shown in the image above. The Bollinger bands follow a simple bell curve as shown below.
According to the bell curve, 68% of the prices are in between the lower and the upper standard deviation. The lower band is one standard deviation below and the upper band is one standard deviation above.
In the above chart, it is set to 2 standard deviations. 95% of the prices are between two standard deviations. This means that we have 95% confidence that the prices will between + or – 2 standard deviations.
To trade with Bollinger bands, you could make a buy order when the prices touch the lower band and exit the trade when the prices reach the middle band. This is possible because most of the prices stay between the 2 standard deviations. When the band touches the upper band, you can enter a sell order and exit that when it reaches the lower band.