Trend Identification Bollinger Bands

Bollinger Bands basically plot standard deviations above and below a moving average. They were developed in the early 1980sby John Bollinger and are typically used to determine volatility. Here, however, I like to use Bollinger Bands to help me gauge a trend.

In the chart below, we plotted a set of standard Bollinger Bands using the settings 20,2 (which mean two standard deviations away from the 20-day moving average) and then added a set of 20,1 Bollinger Bands (one standard deviation away from the 20-day moving average). This helps us to create our buy zone and sell zone.

Typically, when an uptrend in a currency pair is very strong, it will remain in the buy zone, the zone between the upper Bollinger Band of two standard deviations and the upper Bollinger Band of one standard deviation, for some time. When the downtrend is very strong, the currency pair will remain within in the sell zone, the zone between the lower Bollinger Band of two standard devia- tions and the lower Bollinger Band of one standard deviation. If the currency pair closes below the buy zone or above the sell zone, we say that it has entered the range trading zone.

Bollinger Bands are great tools to use to help determine when a currency pair enters or exits a trend. For those traders who like to pick tops and bottoms, a good way to do so is to wait for the currency pair to exit the buy or sell zones.