Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. Bollinger Bands are a pair of lines representing the upper and the lower trading ranges.
On a forex trading platform, when we apply Bollinger Bands for a currency pair, we would see 3 bands (lines); they are the Upper Band, Lower Band and the Middle Band.
For example, in the case of EUR/USD, when the price goes down and touches the lower band, it goes up and when it goes up and touch the upper band then it goes down. Therefore you can see that the Bollinger Bands can predict when you can enter a price and when you can exit a price (when to buy and when to sell). Please refer to ForexAbode.com and see the charts drawn to explain better. Beware that Bolinger Bands are good when the market is in range (neither bullish nor bearish) but not when the market is trending.
Experienced Traders say that Bollinger Bands seldom use alone, as it normally used with other forex indicators such as RSI and Stochastic indicators. Areas of support and resistance are also identified with the use of Bollinger Bands
According to Stephen Aechilis, author of Techical Analysis has the following to say during this indication:
“The basic interpretion of Bolinger Bands is that prices tend to stay within the upper and lower band.The spacing between the bands varies based on the volatility of the prices, the bands widen to become more forgiving. During periods of stagnant pricing (ie. low volatility) the bands narrow to contain prices.”
As you can see, Bollinger Bands are an excellent tool for all types of financial market traders such as the stock market, futures and the commodities.