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Market Conditions for Bollinger Bands

Market Conditions for Bollinger Bands

Richard Krivo, Trading Instructor

Instructor's Response:

The answer to this will best be served by an example chart…see below.
Inasmuch as a trader using Bollinger Bands wants to see price action moving between the upper and lower band, a ranging market best facilitates that.
On the chart below, we can see how trading decisions can be made as price action moves between the bands and provides buy and sell signals.
chart 7 22 10
When this historic 4 hour chart of the EURAUD pair is in a strong downtrend, however, we can see how the upper band does not even come into play. The lower band can be used minimally to determine when a retracement might occur but not too much beyond that.
Bottom Line: Bollinger Bands function best as a currency pair is trading in more of a sideways fashion than in a trend.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.