FOREX THEORY
Bollinger Bands in a Ranging Market
In essence, Bollinger bands contract when there is less
volatility in the market and expand when there is more volatility. Because of
that, Bollinger bands provide a good tool for breakout strategies.
When the bands are thin and contracted, volatility is low
and there should be little movement of price in one direction. However, when
bands start to expand, volatility is increasing and more movement of price in
one direction is likely.
Generally, range trading environments will contain somewhat
narrow bands compared to wide bands and form horizontally. In this case, we can
see that the Bollinger bands are contracted, as price is just moving within a
tight range.
The basic idea of a range-bound strategy is that a currency
pair has a high and low price that it normally trades between.
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