Forex glossary
Bollinger Bands
Bollinger Bands place upper and lower bands around a moving average using a multiple of the selected prices' standard deviation. A common setting is 20 periods and two deviations. They describe relative price position and dispersion; a band touch alone does not specify a trade.
Illustrative example
How does it work in practice?
Assume a 100 USD average, 2 USD standard deviation and a multiplier of two. The bands lie at 96 and 104 USD; touching the upper band does not establish that price will revert.
A case to work through
Price at the upper band
Hypothetically, the lower band is 96, the average 100, the upper band 104 and the close 104.
- Price touches the upper band; the full band spans 8.
- Being at a boundary does not independently specify a sell rule or the next direction.
What follows? Record the observation separately from the strategy condition.
Example boundary: Settings and standard-deviation calculations affect the bands; an outside move may persist.
Three different pieces of information
Text description of the diagram
- Price position: A touch of the upper or lower boundary.
- Band width: Dispersion under the selected window and settings.
- Strategy rule: A separate decision and execution condition.
A useful distinction
Bollinger Bands / Donchian Channel
Bollinger Bands use an average and standard deviation; Donchian boundaries use the highest high and lowest low.
Check your understanding
Calculate band width without inventing a directional signal.
Show the answer and explanation
Price is at the upper band boundary
This describes position without an automatic decision.
Volatility and transformed data
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Related terms
Sources and documentation
- John Bollinger – band rules
Band touches, historical dispersion and normalized BandWidth; touches alone are not orders.
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