Bollinger Bands® are a technical analysis tool that uses a Simple Moving Average (SMA) and standard deviations to track price trends and volatility. The bands expand and contract based on price movement, helping traders identify trends and volatility levels. Learn how to set up Bollinger Bands in MT5 and optimise your trading strategy.
1. SMA plus standard deviations
Bollinger Bands® are a technical analysis tool that uses a Simple Moving Average (SMA) as the main axis (center line) and adds standard deviations (σ: Sigma), depicted as bands, above and below it. We have previously discussed Simple Moving Average, if you need a refresher, you may read our article Introduction to Simple Moving Average. If you are wondering what are the differences between weighted moving average and simple moving average, you can also learn more in the article Weighted moving average and simple moving average in technical analysis..
Figure 1. Bollinger Bands
Each band is formed by adding or subtracting standard deviations from the SMA center line. The calculation method for standard deviation may be complex, but simply put, it represents the normal distribution of data (closing prices) from the average value. In other words, during the calculation period, the more the closing price moves away from the SMA line, the larger the standard deviation; while the closer the closing price is to the SMA, the smaller the standard deviation. This is reflected by the expansion or contraction of the channel bands.
2. A dynamic indicator
This is a dynamic indicator where the bands expand or contract with price movements. This characteristic allows trends and volatility to be confirmed or predicted through changes in the bandwidth of the channel.
Trend = Confirming market direction
By observing the angle of the central SMA line, you can grasp the direction of the trend. When the line moves upwards, it indicates an uptrend, while moving downwards represents a downtrend. If it remains flat, no trend is occurring.
Volatility = Confirming price volatility
The wider the bandwidth, the greater the volatility, while a narrower band indicates less volatility. Additionally, lower volatility can be seen as a preparation stage for high volatility.
Figure 2. Trends and volatility depicted by Bollinger Bands.
3. Setting up Bollinger Bands in MT5: key points
Most charting software defaults to a combination of the SMA and two standard deviations (±1σ, ±2σ), so when people talk about Bollinger Bands, this is the typical configuration. Although the developer of Bollinger Bands, John Bollinger, recommends this combination of a 20-day SMA with the upper and lower bands of ±2σ, the parameters can be customized to suit your own trading strategy.
Figure 3. Basic settings recommended.
Unlike other tools, when setting up Bollinger Bands in MT5, you can only set one standard deviation in the parameter settings screen. If you wish to display other standard deviations simultaneously, you will need to put in a little extra effort to insert them into the chart. If you would like to check out the other tools available for your technical analysis, do visit the technical analysis section of our blog.
The simplest method to set them up is to overlay the Bollinger Bands with different standard deviations for the same period. For example, overlay the ±2σ Bollinger Bands on top of the ±1σ Bollinger Bands.
Summary
To sum it all up, Bollinger Bands are a technical analysis tool made up of a Simple Moving Average as the main axis, with standard deviations (σ: Sigma), depicted as bands, added above and below it.
When setting up Bollinger Bands in MT5, you can only set one standard deviation in the parameter settings screen. If you wish to display other standard deviations simultaneously, you will need to put in a little extra effort to insert them into the chart. The simplest method is to overlay the Bollinger Bands with different standard deviations for the same period. For example, overlay the ±1σ Bollinger Bands with the +2σ Bollinger Bands.
Besides Bollinger Bands, some other tools available are the order and position book, currency strength meter, correlation tool and sentiment chart. These tools usually have an accompanying article which can help market participants combine it with their strategy to achieve a higher probability of success.
Articles that explain how to incorporate the tools into a trading strategy::
Incorporating these technical analysis tools into your trading strategy can make a difference to your trading performance. Besides tools and analysis, generating quality trading ideas systematically is key to profitability. In this respect, collaborating and exchanging ideas with other traders can broaden your trading horizons. Different perspectives and strategies can be gained through interacting with others in forums and groups, and this may also lead to discovering new opportunities in diverse pairs and instruments.
If you are looking for a community of like-minded traders, why not join our newly launched OANDA Prop Trader Community? By joining the community, you will not only gain trade ideas but also earn points and redeem rewards with the points. Don’t miss out, join our community now.
