FOREX THEORY
How to Measure Volatility
2. Bollinger Bands
Bollinger bands are excellent
tools for measuring volatility because that is exactly what it was designed to
do.
Bollinger bands are basically 2
lines that are plotted 2 standard deviations above and below a moving average
for an X amount of time, where X is whatever you want it to be.
So if we set it at 20, we would
have a 20 SMA and two other lines. One line would be plotted +2 standard
deviations above it and the other line would be plotted -2 standard deviations
below.
When the bands contract, it tells
us that volatility is low.
When the bands widen, it tells us
that volatility is high.
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