Student’s Question:In what kind of a market will Bollinger Bands work best…trending or ranging? Thanks.Instructor's Response:The answer to this will best be served by an example chart…see the historical 4 hour chart of the EURAUD 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.When this 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 ranging fashion than in a trend.
Also, to gain more information on the use of Bollinger Bands, traders with a live account can go to our online DailyFX Course at the link below and click on Bollinger Bands. There you will find four separate lessons on that indicator.