Bollinger bands are a great way of understanding market movements if you’re new to the forex game. Everybody uses them, and overall, the concept is relatively easy to understand. And your charting software will do all the work for you – so at first, no need to go into all the math involved.

And here’s a nice enough example. GPB/USD 30-min chart – the currency pair becoming range-bound, candlesticks shortening and then breakout – here, to the downside.

Bollinger bands are a measure of market volatility – in simple terms, when there’s a trend on, or when the price is zigzagging with no clear outcome, the upper and lower bands expand away from each other. When the price settles down (becomes range-bound) the bands begin to come together and that’s the Bollinger squeeze. It’s as if there’s a constriction and the price has to pop out – one way or the other.

How to take advantage of a Bollinger Squeeze
We know there’s an increased probability of imminent breakout – because that’s the way markets, forex, stocks, whatever, tend to work – but which way? That’s the point – it’s not possible to say, just by looking at the Bollinger squeeze and without other information, whether the breakout is going to be bullish or bearish.

So, if your trading platform allows, you might investigate pending, conditional, orders – covering either option. OCO orders – one cancels other can also be the way to go, if you have the option – two orders, where if one is filled, the other order is cancelled. You’ll also be keeping an even closer eye on possible market reaction to news events.

When to pull the trigger?
Of course, the other question is how long the squeeze is going to last before there’s a breakout. Don’t just guess on a trade and click one off immediately, just because you’ve seen the Bollinger squeeze come on. It may be 5 time periods, it may be 30.

Cause and Effect
Indeed, just because there’s a squeeze, there’s no absolute proof there’s going to be a breakout, ever - that would be falling into the trap of thinking that an indicator creates a market – it’s the other way round.

There’s more information about Bollinger bands, and if you ever feel like going through the theory attached, it’s all here.

4 Responses to “The Bollinger Squeeze”

1. GregCorso says:

   February 13, 2009 at 10:58 am

   Yep, exactly – markets make the indicators and fools jump ahead

   Reply
2. The Bollinger Squeeze says:

   February 13, 2009 at 11:05 am

   [...] Original post by ForexPerform – Learn Forex Trading [...]

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3. The Bollinger Squeeze says:

   February 13, 2009 at 11:42 am

   [...] Original post by ForexPerform [...]

   Reply
4. The Bollinger Squeeze says:

   February 13, 2009 at 12:10 pm

   [...] Original post by ForexPerform – Learn Forex Trading [...]

   Reply