One of the more popular technical indicators in use today is Bollinger Bands. Created by John Bollinger in the early 1980s, this tool is essentially a Moving Average with a volatility filter.
Volatility can be of great value in an indicator for those times when the market is swinging wildly between the lows and the highs as a result of some news event. If the average swing for a currency pair is 50 pips in a quiet market, but expands to 100 pips in a volatile market, a trader has to adjust their approach to account for the bigger swings. After all, a 50 pip stop is different in a quiet market than it is in a volatile market. What makes Bollinger Bands different is that the distance between the bands is designed to widen when the market becomes volatile and tighten when the market is quiet. When using this tool to find a trade, the first step is to identify the direction of the trend on the daily chart. If the daily trend is up, we want to look for buys only and if the daily trend is down, we want to look for sells. So if the market is in a downtrend, we should look to sell on a test of the upper Bollinger Band and if the market is in an uptrend, then we should look to buy on a test of the lower Bollinger Band. That entry price level will move further away from the market in volatile times, giving you a better entry that is adjusted to the current situation rather than past activity.
Written by Dailyfx.com