Technical Trading Tips and Techniques by 
(Please click on the accompanying chart to enlarge.)
Most Forex traders are familiar with Bollinger Bands, as they are one of the most popular indicators available. The primary purpose of the Bollinger Bands is to provide a measure of relative volatility. It does this by plotting two bands that are usually at two standard deviations above and below a simple moving average. In volatile market conditions, the Bands become wider. During less volatile conditions, the Bands become narrower.
Some technical traders view a narrowing of the Bollinger Bands (”The Squeeze”) as a potential indication that a sharp increase in volatility is impending, in either direction. This is akin to trading volatility breakouts.
One valuable adjunct to the Bollinger Bands is the Bollinger Bandwidth indicator, found at the bottom pane of the accompanying chart. This indicator shows the width of the Bollinger Bands in relative terms, and makes it easier to view whether volatility is high or low. Not all traders are familiar with the Bollinger Bandwidth indicator, but it is certainly a very useful tool for measuring volatility at a glance, as well as facilitating trading of “The Squeeze.” Thanks, everyone, and have a great weekend!
- James
James Chen is the Chief Technical Analyst at FX Solutions, a leading Forex broker. He is also a registered Commodity Trading Advisor (CTA) and a Chartered Market Technician (CMT) Level 3 candidate. At FX Solutions, Mr. Chen writes daily currency analysis, conducts forex trading seminars, and has authored numerous articles on currency trading and technical analysis for major financial publications. His upcoming book, Essentials of Foreign Exchange Trading