The Bollinger Bands®

Developed by John Bollinger, the Bollinger Bands® measure market volatility and provide tons of useful information:

  • trend continuation or reversal;
  • periods of market consolidation;
  • periods of upcoming large volatility breakouts;
  • possible market tops or bottoms and potential price targets.

The Bollinger Bands® consist of three bands, which revolve around a centred simple moving average (SMA) with the default value of 20, of which 85% of the time, the price is held within the following boundaries:

  • Lower band – SMA minus two standard deviations;
  • Upper band – SMA plus two standard deviations.

The Bollinger Bands® contain a default setting in Forex as (20,2), of which the settings will be used in the diagrams.

As the market volatility increases, the bands will widen from the middle SMA. Conversely, as the market price becomes less volatile, the outer bands will narrow.

When using trading bands, it is the action of the price as it nears the edges of the band is when we become interested. For a technical analyst trader, trading near the outer bands gives an element of confidence that there is resistance (upper boundary) or support (bottom boundary), however, this alone does not provide relevant buy or sell signals alone; all that it determines is whether prices are high or low on a relative basis.

Given this information, a trader can enter a buy or sell trade by using indicators to confirm their price action. Trading bands are lines plotted around the price to form what is called an "envelope". Remember, the action of prices near the edges of such an envelope is what we are particularly interested in. The default Bollinger Bands® formula consists of:

  1. an N-period moving average (MA);
  2. an upper band at K times an N-period standard deviation above the moving average (MA + Kσ);
  3. a lower band at K times an N-period standard deviation below the moving average (MA − Kσ).

The Bollinger Bands® can be applied to virtually any market or security. For all markets and issues, I would use a 20-day calculation period as a starting point and only stray from it when the circumstances compel me to do so. As you lengthen the number of periods involved, you need to increase the number of standard deviations employed. At 50 periods, two and a half standard deviations are a good selection, while at 10 periods one and a half do the job quite well.

BB periods and deviations

We can use the indicator for the following Bollinger Bands® trading strategies:

  1. Double Bollinger Band® Daily Trading
  2. Scalping
  3. Bollinger Band® Squeeze with Admiral Keltner


Daily Trading with DBBs (Double Bollinger Bands)

Ms Kathy Lien, a well-known Forex analyst and trader, described a very good technique for the Bollinger Bands indicators combo, namely DBB – Double Bollinger Bands. In her book The Little Book of Currency Trading, she wrote that this was her favourite method. Originally, the DBB can be applied to technical analysis for any actively traded asset traded on big liquid markets like Forex, stocks, commodities, equities, bonds, etc. This is how you apply it on your chart:

  1. Insert the Bollinger Bands® on the chart;
  2. Go to Settings and select two standard deviations and 20 period SMA.

Bollinger Bands SMA settings

Source: Admiral Markets Platform

3. Insert a second set of the Bollinger Bands® with a different color

4. Go to settings and select 1 standard deviations and 20-period SMA

Bollinger Bands 20-period SMA

Source: Admiral Markets Platform

When the chart has been set up, we need to mark the zones next.

GBP/JPY H4 Chart, Admiral Markets Platform, Jul 10-Aug 18

Source: GBP/JPY H4 Chart, Admiral Markets Platform, Jul 10-Aug 18

A1: The upper BB (Bollinger Band®) line that is two standard deviations away from line X, which is the 20-period simple moving average (SMA);
B1: The upper BB line that is one standard deviation from the 20-period SMA;
X: The 20-period SMA of the H4. This serves as both the center of the DBBs and baseline for determining the location of the other bands;
B2: The lower BB line that is one standard deviation from the 20-period SMA;

A2: The lower BB line that is two standard deviations from the 20-period SMA.

These bands represent four distinct trading zones used by traders to place trades.

GBP/JPY H4 Chart, Admiral Markets Platform, Jul 10-Aug 18

Source: GBP/JPY H4 Chart, Admiral Markets Platform, Jul 10-Aug 18

  1. The Buy Zone is between lines A1 and B1;
  2. The Neutral Zone 1 between lines B1 and X;
  3. The Neutral Zone 2 between lines X and B2;
  4. The Sell Zone between lines B2 and A2.

According to the main theory behind the DBBs, Ms Kathy Lien described that we should combine the two middle areas and focus on three zones:

  1. Upper quarter
  2. The middle half
  3. The bottom quarter

The DBB Buy Zone:

When price is within this upper zone (between the two upper lines, A1 and B1), it tells us that the uptrend is strong, and there is a higher chance that the price will continue up. As long as candles continue to close in the topmost zone, the odds favour maintaining current long positions or even open new ones.


The DBB Sell Zone

When price is in the bottom zone (between the two lowest lines, A2 and B2), the downtrend will probably continue. That tells us that as long as the candles close in the lowest zone, a trader should maintain current short positions or open new ones.

The DBB Neutral Zone

When price gets within the area defined by the one standard deviation bands (B1 and B2), there is no strong trend, price is likely to fluctuate within a trading range because momentum is no longer strong enough for us to continue the trend. The 20-day simple moving average (X) that serves as the baseline for the Bollinger Bands® is in the centre of the zone.


GBP/JPY H4 Chart, Admiral Markets Platform, May 11-Jun 23

Source: GBP/JPY H4 Chart, Admiral Markets Platform, May 11-Jun 23


According to the rules, whichever zone the price is in, it will signal whether you should be:

Trading in the direction of the trend, long or short, depending on whether the trend is up or down. Basically, if the price is in the upper zone, you go long, if it's in the lower zone, you go short. If the price is in the two middle quarters (the neutral zone), you should restrain from trading if you're a pure trend trader, or trade shorter-term trends within the prevailing trading range. Usually, traders trade higher time frames H4 or Daily with this strategy.

Bollinger Bands® Scalping

This strategy uses 5 indicators applied on the chart:

  1. Bollinger Bands® (14,1), green
  2. Admiral Markets Pivot (H1)
  3. Bill Williams' Awesome Oscillator
  4. RSI (14)
  5. EMA (4), red

Time frame for trading this Forex scalping strategy is either M1, M5, or M15. Targets are Admiral Pivot points set on H1 time frame. Stop-loss is placed below interim Admiral pivot support (for long trades) or above interim Admiral Pivot resistance (for short trades). The strategy should be traded with major Forex pairs.

Buy Trade

EUR/USD, Admiral Markets Platform M5 Chart, Aug 18

Source: EUR/USD, Admiral Markets Platform M5 Chart, Aug 18

When the 4 EMA crosses up through the middle Bollinger Band® at the same time, the Chaos Awesome Oscillator should be crossing their zero lines, going up, and the RSI should be coming up and crossing its 50 line.

Sell Trade

EUR/USD, Admiral Markets Platform M5 Chart, Aug 17-18

Source: EUR/USD, Admiral Markets Platform M5 Chart, Aug 17-18

When the 4 EMA crosses up through the middle Bollinger Band® at the same time, the Chaos Awesome Oscillator should be crossing their zero lines, going up, and the RSI should be coming up and crossing its 50 line.

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Bollinger Band® Squeeze with Admiral Keltner

This strategy uses two indicators applied on the chart:

  1. Bollinger Bands
  2. Admiral Markets Keltner

With both the Bollinger Bands® and Admiral Keltner, I use the default settings that are used on the vast majority of trading platforms that I've seen:

Bollinger Bands: Length 20, Standard Deviation 2

Keltner Channels: Length 20

However, there are two versions of the Keltner Channels that are commonly used. In my opinion, Admiral Keltner is possibly the best version of the indicator in the open market because the bands are derived from the Average True Range.

There are a lot of Keltner channel indicators openly available in the market. However, during the testing period of various Keltner channel indicators, I noticed there were a lot of different versions of the indicator itself. You should not only be sure that you're using the formulation that uses Average True Range, but also that the centre line is the 20-period exponential moving average. The Admiral Markets Keltner indicator has all the settings correctly coded in the indicator itself, and it should look like this:

Admiral Keltner Indicator

Source: Admiral Keltner Indicator

Understanding this term is the key to understanding of how a Bollinger Band® detects and displays fluctuations in the degree of volatility. Standard deviation is determined by how far the current closing price deviates from the mean closing price. The general concept is that the farther the closing price is from the average closing price, the more volatile a market is deemed to be, and vice versa. That is what determines the degree of contraction or expansion of a Bollinger Band®.

GBP/JPY H4 Chart, AM MT4 Platform, June 16, 20:00

Source: GBP/JPY H4 Chart, AM MT4 Platform, June 16, 20:00

In the above chart, at point 1, the blue arrow is indicating a squeeze. At point 2, the blue arrow is indicating another squeeze. Same with point 3.

What's difficult about this situation is that we still don't know if this squeeze is a valid breakout. What we need to do is quantify how narrow the squeeze should be in order to qualify for a Bollinger Bands® With Admiral Keltner Breakout Strategy breakout setup.

The way we do this is to add the Admiral Keltner channel to the chart.

GBP/JPY H4 Chart, AM MT4 Platform, June 16, 20:00

Source: GBP/JPY H4 Chart, AM MT4 Platform, June 16, 20:00

Bollinger Bands=Green

Keltner Channel=Red

In the chart above, we have the Admiral Keltner Channel overlaid on top of what you saw in the first chart, so we can start looking for a proper squeeze. You should only trade a setup that meets the following criteria that is shown in the chart below.

GBP/JPY M30 Chart, AM MT4 Platform, March 10, 18:30

Source: GBP/JPY M30 Chart, AM MT4 Platform, March 10, 18:30

  1. Consider only taking a Bollinger Bands® With Admiral Keltner Breakout Strategy trade when both the upper and lower Bollinger Bands® go inside the Keltner Channel. That is the only proper way to trade this strategy.
  2. The yellow highlight shows examples of the Bollinger Bands® (green lines) going inside the Keltner Channel (red lines).
  3. At those zones, the squeeze has started.
  4. When the Bollinger Bands® (both green lines) start to come out of the Keltner Channel (red lines), the squeeze has been released and a move is about to take place.
  5. Wait for a buy or sell trade trigger.

The Bollinger Bands® and Keltner Channels tell you when a market is transitioning from low to higher volatility. Using these two indicators together is stronger than using a single indicator and both indicators should be used together.

Trade Trigger

GBP/JPY M30 Chart, AM MT4 Platform, March 10, 18:30

Source: GBP/JPY M30 Chart, AM MT4 Platform, March 10, 18:30

Buy: When a squeeze is formed, wait for the upper Bollinger Band® to cross upward through the upper Keltner Channel and wait for the price to break the upper band for entry long.


Sell: When a squeeze is formed, wait for the lower Bollinger Band® to cross through the downward lower Keltner Channel and wait for the the price to break the lower band for entry short.

Another example is shown below. After both the squeeze and release took place, we just needed to wait for the candle to break above/below the Bollinger Band® and take the trade.

GBP/JPY M30 Chart, AM MT4 Platform, February 23, 00:00

Source: GBP/JPY M30 Chart, AM MT4 Platform, February 23, 00:00

In the example above, we can also see that there was no entry after the release because there was no candle breakout that could have triggered the trade.

Recommended time frames for the strategy are M30-D1 charts. The strategy can be applied to any instrument. Intraday breakout trading is mostly done on M30 and H1 charts. I advise using the Admiral Pivot point for placing stop-losses and targets.

The stop-loss for buy trades is placed 5-10 pips below the Bollinger Band® middle line or below the closest Admiral Pivot support, while the stop-loss for short trades is placed 5-10 pips above the Bollinger Bands® middle line or above the closest Admiral Pivot support.

Target levels are calculated with the Admiral Pivot indicator. For M30-H1 chart, we use daily pivots, for H4 and D1 charts, weekly pivots. Both settings can be changed easily in the indicator itself.

EUR/USD M30 Chart, AM MT4 Platform, June 16, 22:00

Source: EUR/USD M30 Chart, AM MT4 Platform, June 16, 22:00


Tips for Bollinger Band® Trading

1. The Bollinger Bands® provide a relative definition of high and low.

2. The relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.

3. Appropriate indicators can derive from momentum, volume, sentiment, open interest, intermarket data, etc.

4. Volatility and trend have already been deployed in the construction of the Bollinger Bands®, so their use for confirmation of price action is not recommended.

5. The indicators used should not be directly related to one another. For example, you might use the one-momentum or one-volume indicator successfully, but the two-momentum indicators aren't better than one.

6. The Bollinger Bands® can also be used to clarify pure price patterns such as M-tops and W-bottoms, momentum shifts, etc.

7. The price can, and does, walk up the upper Bollinger Band® and down the lower Bollinger Band®.

8. Closes outside the Bollinger Bands® are continuation, not reversal signals (this has been the basis for many successful volatility breakout systems.)

9. As the default parameters for the moving average line is 20 periods, this forms the basis for the standard deviation calculations, of which two standard deviations form the bandwidth as the defaults. Such parameters may require tailoring for any given market.

10. The average deployed should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-term trend.

11. If the average is lengthened, the number of standard deviations needs to be increased simultaneously; from 2 at 20 periods to 2.5 at 50 periods. Likewise, if the average is shortened, the number of standard deviations should be reduced; from 2 at 20 periods to 1.5 at 10 periods.

12. The Bollinger Bands® are based on a simple moving average. This is because a simple moving average is used in the standard deviation calculation, and we wish to be logically consistent.

13. Make no statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The sample size in most deployments of the Bollinger Bands® is simply too small for statistical significance.

14. Indicators can be normalised with %b, eliminating fixed thresholds in the process.

15. Finally, tags of the bands are just tags, not signals. A tag of the upper Bollinger Band® shouldn't be treated as in-and-of-itself a sell signal. The same applies to a tag of the lower Bollinger Band®. It is not considered in-and-of-itself a buy signal.


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