You can measure Volatility Using Bollinger Bands by observing how the bands contract and expand.
Bollinger band is an outstanding volatility Forex indicator because it was designed majorly to measure volatility. First, let’s have a small recap of what Bollinger Bands are;
What are bollinger bands
Bollinger bands comprises of 2 lines on the lower and upper side of the price movement with a moving average in the middle.
It moves along following price and normally expand and contract as volatility increases and decreases.
If the moving average is set at 30, the upper band will be plotted at a standard deviation of +3 and the lower band at a standard deviation of -3.
The Moving Average value is what determines what standard deviation to set!
Bollinger bands contract and expand depending on the volatility in the market.
- On contraction – low volatility.
- Expansion – high volatility.
Let’s take a look at the GOLD, Hourly chart below.
From the above chart,
It is so clear that as the bands started getting closer/contract, price started making small candlesticks and ranging.
The upper and lower bands contract as price ranges between them. This is an indication of low volatility in the market.
On the other hand,
As the bands expand, we see an increase in price volume making large movements. This is because of high volatility in the market.
Therefore, when using bollinger bands and you notice bands expanding, expect to see a big price rally in the market. The opposite is true.
How to measure Volatility using Bollinger bands
To measure volatility using bollinger bands in forex!!
This is very simple. Just follow the bands and the way they behave.
For instance,
When the bands expand, it tells you that volatility is high.
If this happens on a breakout, take trade after confirmation.
In case you have a running trade, you may need to adjust your stop loss to fit the volatility.
On the other hand,
If the bands contract, It shows that volatility is low.
Price maybe getting in a ranging period. You may need to close your open position and wait for after price breakout.
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