Three consecutive closes breaking the sell band.

Together with the increasing volatility, this is a signal that the rate is about to reverse making this a good "buy in" point. After several closes below the support level, the exchange rate reversed its direction shortly after posting a double-bottom. A double-top signified the end of a series of intra-period closings above the top band the resistance level indicating a rate reversal.

How to Use Bollinger Bands - Fidelity

For more information on price chart patterns including "double-tops" and "head-and-shoulders" patterns, see Recognizing Bar Chart and Line Chart Patterns in Lesson 6 of A Concise Introduction to Currency Trading.

Setting Bollinger Band Parameters. Putting It All Together. This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.

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How to Use Bollinger Bands - Fidelity

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Restricting cookies will prevent you benefiting from some of the functionality of our website. Download our Mobile Apps Currency Converter App Forex Trade App. Overview Volatility describes the degree by which an exchange rate varies over time.

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Forex traders pay close attention to volatility as volatility tends to increase just prior to a rate reversal. As the reversal gains in momentum, volatility tends to sharply increase as traders act to take advantage of the change in direction. Bollinger Bands show relative volatility changes through the width of the bands themselves - the wider the bands, the greater the volatility.

In the following example, you can see that at the far left of the chart, the upper and lower bands are close together and are near the moving average line. The exchange rate then flattens out and the upper and lower bands begin to move closer together indicating that volatility has subsided. Using Bollinger Bands to Signal Trend Reversals - Breaking the Bands When the spot rate falls outside the bands, it is said to be "breaking the bands".

Breaking the bands occurs during times of extreme volatility and is the strongest signal issued by Bollinger Bands that a trend reversal is imminent. As we learned earlier, two standard deviations include about 95 percent of all data for a normal data pattern.

Therefore, market rates should only break the bands about five percent of the time when viewing two standard deviations. Rates Breaking the Bands Three consecutive closes breaking the sell band. Double Tops and Double Bottoms The existence of price chart patterns such as double tops and double bottoms can help identify buy and sell opportunities. When a rate reaches the highest level that the market is willing to pay - that is, the resistance level - the rate usually holds at the level creating a second plateau more or less equal to the previous level.

This is the second part of the double top and if the rally is to be extended, the second top may be slightly higher. If the subsequent top is lower, this is seen as a signal that a rate reversal is imminent as traders sell their positions or short the currency pair outright in anticipation of a drop in the exchange rate. A double bottom is basically the same as a double top but is seen as a signal that the support level for an exchange rate has been reached resulting in an increase in the rate.

This is because once the market is prepared to support the rate from dropping further, buyers enter the market in an attempt to buy into the currency pair at a low point prior to an upswing.

Bollinger Bands Volatility and Rate Reversal Signals | OANDA

Sample Candlestick Chart with Bollinger overlay After several closes below the support level, the exchange rate reversed its direction shortly after posting a double-bottom A double-top signified the end of a series of intra-period closings above the top band the resistance level indicating a rate reversal.

Volatility and Rate Reversal Signals. Setting Bollinger Band Parameters 5. Losses can exceed investment.