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Bollinger Bands Explained

The Bollinger band is a technical indicator in Forex trading, stocks, bitcoin and anything that uses a chart to determine price. It measures the deviation of the previous candles (you set how many candles) and finds the deviation of those prices, plotting a set of lines that visually display where that deviation is around the current price. One band is lower, another sits in the middle and the other band is the upper band. The Bollinger bands are a set of three lines, with the upper and lower showing a kind of extreme value depending on your settings. The Bollinger bands can be used for a range of technical analysis including when a price is out of its normal range and also to determine when price is within a normal range. To measure normal range you might set deviation to something like 1 or 1.3, whereas to find when price is out of normal trading range, the deviation might be set to something like 2.5 or higher. 

Bollinger Band Strategy

Bollinger bands are widely used and for good reason. They can determine a lot of information that is useful for trading. One strategy is to set the bands far apart (with a deviation of 2.5 or more) and when price is outside of the outer bands, the trader places an order back towards the middle band. So, if the price is above the Bollinger band, the trader will sell, often holding the position until it retraces back to a more normal price, inside the bands. On the other hand, when price is below the lower band, a trader might look to buy that trade with the hope it will return to a more normal price inside the bands shortly after.

An alternate way to view the Bollinger band is to use it as a normal trading test. Using the Bollinger bands to determine whether price is in it’s normal trading range is useful for identifying when a trader might be able to use another strategy, in line with normal trading. When price is outside of the Bollinger bands, a trader may simply wait until the price has normalized before actioning their strategy.

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Bollinger Band Forex

Forex is a massive market, and Bollinger bands for forex are used the same way as other markets might be used. Bollinger bands are useful in not only Forex, but also crypto, shares, indices and anything with a chart that measures price.

Bollinger Band Indicator MT4 and MT5

The MetaTrader 4 and 5 platforms, also known as MT4 and MT5 respectively, have many standard indicators which can be found in their navigator section. Pressing CTRL N (for navigator) will display or remove the navigator from sight in both platforms. To get the Bollinger Bands onto any chart, simply locate the Indicator in your Navigator, usually under Indicators, then Trend, and drag and drop the Bollinger Bands onto your chart with your mouse. A settings box should pop up allowing you to input the period and deviation. Often a period of 20 is useful enough, and a deviation of 2.5 is good for seeing when the market is moving fast. Otherwise, to see normalized price you may want your deviation set to 1.3 or perhaps even less! Depending on your strategy, it might be more or less and this can always be tested with the strategy tester if you know how to code.

Best Bollinger Band Setting For Day Trading

If you are day trading using Bollinger bands, there’s a good chance you won’t be looking at normal price. Your settings will likely be using a higher deviation of 2.5 or higher and a period of 20 or more. 

A good way to test your settings is to have a look what happened to price previously when you select your settings. If you see an opportunity (in hindsight) and your indicator matches, that’s great. See if it works over and over again, knowing that some trades won’t work. If it does, great but if not then you might want to play around with your settings to see what will work for you. Trial and error is massive with Day Trading and the markets are always changing. If you want consistent success without as much work (once the code is written), check out our trading robots page.

Double Bollinger Band Strategy

The concept of using two Bollinger bands is similar to using a set of Simple moving averages (SMA). Interesting concept, to learn more you can head over to DailyFX and see what it is all about. There’s millions of strategies, but after coding and testing using the Strategy Tester, it is easy to filter.

Looking for a Bollinger Band Stock Screener?

Stocks are forever moving, and there’s so many of them. Fortunately, brokers and their MT5 platforms are enabling more markets, including the ASX and US markets. That means we can easily filter stocks that are ‘out of range’ and cheap using an amazing tool created for MT5. This tool is called WeeklyOutage and shows stocks that have taken a serious hit recently.


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