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Bollinger Bands and Break-Outs
September 06, 2006

Written by Adam Rosen, PowerCourse Instructor

The FX market is in a constant state of fluctuation between a range bound and trending condition. In a range bound environment, the buyers and sellers continue to focus their attention to recent high and low prices with the hopes that this current range will persist in the near future. On the other hand, a trending market can be identified as one that extends to an overwhelming degree to one direction or the other; higher or lower. Once we have identified the current market condition, there are a number of rather simple steps we may take to take advantage of future potential moves. However the difficulty may lie in the transition period between one market condition and another. For that reason, we may employ the use of a secondary indicator such as the Bollinger bands to help differentiate between the two. For example, the following chart shows the market as it first remains inside its two respective Bollinger bands as well as its predefined trading range. Eventually this trading range breaks out to a new high as an upward trend now begins. This can be seen very easily in with the use of the Bollinger Bands. At times the market may drift below the lower band and above the upper band, only to return back inside its predefined range. However this breakout is marked as the subsequent candle breaks and closes above the upper band. This additional sign of strength now tells us the likelihood of a new uptrend increases dramatically, and put the probabilities of success in the anticipation this new trend and higher prices to come.