Bollinger Bands As Forex Trading Alert

Bollinger Bands in forex trading are popular forex trading alerts. Developed by John Bollinger in 1980s, they are commonly used by traders and investors for comparing the relative price levels and volatility over a certain time period.

The Bollinger bands in forex trading were developed to fulfill the need for adaptive trading bands. They comprise of three bands designed to cover the majority of a currency price action. The middle band is a measure of the intermediate-term trend, usually a simple moving average that serves as the base for the upper band and lower band. The gap or interval between the upper and lower bands and the middle band is determined by volatility. The default time period parameters are 20 periods, where the two standard deviations can be adjusted.

Bollinger Bands are comprised of three components:

1. A moving average band in the middle
2. A band at the upper position
3. A band at the lower position

Bollinger bands as forex trading alert, are seen adjusting themselves to the market conditions currently. It is seen that the bands contract toward the moving average during periods of lower volatility, and during the high volatile periods, the distance between the two bands widens.

Although Bollinger bands in forex help to generate buy and sell signals, their main aim is not to determine the future direction of a trade. They were designed to complement and enhance the functioning of other forex trading alerts. However the Bollinger Bands in forex trading have two primary functions which are:

Identifying high and low volatility periods

Identifying those periods when the prices are at extreme, and possibly unsustainable, levels.

Different traders are seen using Bollinger Bands as forex trading alerts in different ways. Some prefer to buy when the price is touching the lower Bollinger Band and often are seen closing the trades when price is at the moving average in the middle of the bands. Some traders are also located buying the trades when the price is breaking above the upper Bollinger Band or selling when the price is below the lower Bollinger Band. The maximum use of Bollinger Bands in forex is seen among the volatility traders who often sell options when the bands are far apart or buy when the Bands are close together. They expect volatility to revert back towards the average historical volatility level in both instances.

While every strategy in forex has its drawbacks, using Bollinger bands as forex trading alerts have become one of the most popular and commonly used tools to highlight extreme short-term prices in a security. They are commonly used with other forex alerts for confirmations.