How to measure volatility using Bollinger bands

The Bollinger band is an outstanding volatility forex indicator because it was designed majory to measure volatility. They are two lines drawn on the lower and upper side of the price movement having a moving average in the middle.

Bollinger bands move along following price and normally contract when volatility is low and widen when volatility is high.

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!

This is how Bollinger bands are used to measure volatility;

  • 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, as price started to move very slowly and ranging. The upper and lower bands as much closer 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 induced by increased volatility in the market. Therefore, when using bollinger bands and you notice bands expanding, expect to see a big price rally in the market.

Knowing the market volatility is very helpful especially when setting stop loss levels and target profits.

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