Bollinger Bands for Forex

Squeeze into London, not into a vacuum.

Intermediate 5 min read Course 13 of 60

Course 13 of 60 in the forex hub. On a currency pair the bands mostly tell you how quiet or busy the pair has been, and the session clock decides what a squeeze is worth.

A Squeeze Before London

Bollinger Bands wrap a moving average with two lines that sit a set number of standard deviations above and below it. The common setting is a 20-period average with bands two standard deviations out. When the pair gets quiet the bands pinch together, and when it gets busy they spread apart. That's all they do. They measure how much the pair has been moving lately.

People get in trouble treating the outer band like a wall. Price can sit on the upper band for days in a trend. On a currency pair the session clock changes how the bands behave, and that's most of what's worth learning here.

1. What the bands measure

Because the bands are built from recent price swings, they're always describing the past. A wide band tells you the pair has been moving a lot. It doesn't tell you it will keep doing that. A narrow band says the last stretch was quiet, which on most pairs is normal for the Asian hours.

I treat the band width as a sizing input more than a signal. When the bands are wide, a sensible stop is wider, so the same dollar risk buys fewer lots. When they're narrow I'm suspicious of how tight my stop looks, because that width was measured on a quiet stretch and the next session can be wider. I check both numbers with the P&L calculator before anything goes on.

2. Squeeze

A squeeze means the bands have pinched tight. On a major pair that often happens overnight, and the break tends to come when London opens. The squeeze names a tight range. It says nothing about direction. Fading a band edge into a scheduled release is the classic way to get this wrong.

Fading the upper band with a 12-pip stop into a payrolls release: $145 at risk is $145 / 12 = about $12 a pip, or 1.2 standard lots of EUR/USD. If the release moves the pair 40 pips in a minute, the stop is gone before the band means anything.

A 12-pip stop is sized for a quiet chart. If you want to trade the squeeze itself, wait for the break and size for the bigger stop it needs. If you want to fade the band, do it on a day with nothing on the calendar.

Squeeze into London is a clock. Squeeze into a vacuum is a shrug squeezeLondonbreak or fake

3. Fade vs break

There are two ways to use the bands, and they pull in opposite directions. In a range, price touching the outer band and turning back toward the average is a fade setup, with the middle line as a sensible target. In a trend, price closing outside the band again and again is a sign of strength, and fading it means standing in front of the move.

Pick one before you look at the chart, based on the higher timeframe and the session. Mixing them is how traders end up short at the upper band in a strong uptrend, telling themselves it's a range trade.

Are you fading a band or trading the expansion? Named session + HTF range? Fade the band target the mid Or trade expansion do not mix the two

4. Session

The session matters more than the band setting. A squeeze in the middle of the Asian hours often just leads to more quiet. A squeeze that runs into the London open, or into the New York morning while London is still trading, has a fresh session landing right on top of it. I'd only trust a squeeze that has a session coming to resolve it.

Put the band width and the session in the same note. A squeeze I wanted London to break is finished once London has closed, and I cancel it instead of dragging it through the afternoon.

5. Failure

When price walks along the band, closing outside it bar after bar while the higher timeframe agrees, that's a trend. You trail a stop behind it. You don't fight it. The losing version is shorting at two standard deviations in a trend with the stop placed at 'the band', and then watching the band move up with price so the stop never means anything.

Stops go at a price where the idea is wrong. The band moves every bar, so it can't be that price. The same goes for any indicator line, including the one in the lesson on MACD.

Walking the band is a trend. Fading it is how accounts die Walk Close outside repeatedlyHTF agreesTrail, do not fade Failed fade You shorted 2σ in a trendStop was 'the band'The band followed price

6. Where band traders get hurt

Fading every touch on a news day is the big one. Others: tweaking the settings every week until the last month's chart looks perfect, copying a band trade off a stream without knowing the stop, and ignoring the spread on a fade with a small target.

Next is the lesson on oscillators, which asks the same range-or-trend question.

A squeeze says a move is near and nothing about direction

Measure the band width at the end of the Asian session for a few weeks on the pair you trade. You'll learn what a normal overnight squeeze looks like on that pair, and which ones actually broke at the London open.

Leave the settings alone while you do it. Twenty periods and two standard deviations are fine. Changing them to fit last month is how a chart starts telling you what you want to hear.

Using bands without fooling yourself

  • The bands measure recent volatility. They aren't walls.
  • Decide fade or trend before the trade, from the higher timeframe and the session.
  • Trust a squeeze only when a session open is coming to break it.
  • Put the stop at a price, never at a band that moves every bar.

On a news day I'd rather watch the bands than trade them. Educational only. Not a recommendation to buy, sell, or hold any contract or pair.