Bollinger Bands were created in the 1980s by John Bollinger. They are one of the most utilized indicators in the Forex market and allow us to see the maximum and minimum zones in the trend and the direction of the financial asset subject to trade. The 20-day simple moving average and two standard deviations around this average signify the three lines created with the lower and upper band points. In the Bollinger Bands indicator, adjustments can be made in terms of adaptation to the asset in terms of both the moving average number and the standard deviation value.
The reliability of these values can be determined through an understanding of their statistical significance. For instance, one standard deviation value can signify a 68% probability. Two standard deviations can signify a value of 95% probability, and three standard deviations can signify statistically a 99% probability or reliability. At the same time, the 20-period moving average can be revised as a nine or 14-period moving average.
In order to reach the Bollinger Bands indicator in the MetaTrader platform, you can respectively click on Toolbar, Insert, Indicator, then click “Trend”.
When you upload the indicator into the platform, there are three sections: Parameters, Levels, and Visualization. If there is a change made, the section that you need to pay the most attention to is saved in Parameters.
You can find brief information below about the Period, Apply To, and Deviation categories that appear in the Parameters section.
The Period section represents 20 for the indicator as to the standard. In this section, prices are displayed, and the averages of which are taken. These numbers can be universal numbers such as 20, 50, 100, 200. Or Fibonacci numbers such as 13, 21, 34, 55, 89, 144, and 233, or other random numbers such as 10 can be taken into consideration for the short term. What you need to know here is that the related indicator shows the trend expectation at its maximum and in the most sensitive way to the traders, rather than the precise value.
The Apply To section. The average of the related price is taken as much as the number ranked in the period section. The most essential characteristic of the Apply To section is the freedom to choose the relevant asset price type. As the standard, the averages are formalized with taking the closing price as the base. However, there are a lot of options such as the opening price, the highest price, the lowest price, the median price, as well as the closing price. As a standard, the prices in the moving average calculation in the Bollinger Bands indicator should be taken into consideration as the closing price.
Deviation Section. We determine how much the up or down deviation should be in the price of the asset subject to trade in this section. The main goal here is to interpret the trend expectation of the asset price in the Bollinger Bands indicator view in the most logical way. With increases or decreases to the deviation value, a trend graph that is appropriate to the asset price can be created.
For instance, one standard deviation value signifies a 68% probability. Two standard deviations signify 95% probability, and three standard deviations signify 99% probability/reliability.
When interpreting the Bollinger Bands indicator, what we need to pay the most attention is the expectation on the trend related to the financial asset that is to be traded. This is because this indicator generally has a popular view by taking into consideration the “buy” strategy from the band’s sub-point and “sell” strategy from the band’s top point. Nevertheless, sometimes, this strategy may not produce successful results. One of the cases where this happens is when the related asset wants to have an active part in the trend view and when the probable deviations outside of the band hurt the stop loss use because of the increasing sensitivity on the pricing.
Another point to pay attention to in the Bollinger Bands indicator is the volatility of the moves that will form at the end of the horizontal trend times where the financial asset to be traded creates tight pricing behavior. This means a financial asset that is moving calmly for a long time and moves horizontally in the Bollinger bands can create an essential change in the band points with the pricing behavior it will create over time. In the graphic above, the downward pricing behaviors that occur after horizontal pricing behaviors and GBP-USD parity’s transition from the horizontal trend to the negative trend stand out. For this reason, as we shared in the section above, the return strategies that will take place in the top and down points of the band affect your trade performance in these cases. Thus, not all returns should be interpreted as a signal, there must be confirmation regarding the current returns with auxiliary tools and these strategies must be generally in harmony with the trend view.
In short: The Bollinger Bands indicator is an indicator created by drawing on from moving averages in order to see the trend of the asset that is to be traded. The indicator can be used according to the asset with various revisions. As in every indicator, the Bollinger Bands indicator must not be used on its own and it shouldn’t be forgotten that the trading strategy should be set with more than one auxiliary tool.