Just as in the charts of stocks and options trading, Bollinger bands are also being used in Currency Trading Charts. Bollinger bands is a set of three lines or bands which act as an indicator for providing a signal to the traders about a new pattern being formed or possible breakouts. One of the line passes exactly through the different points in the chart since it is a simple moving average for a particular duration of time. Further, the upper and the lower lines denote the standard deviation for the fluctuations in the same duration of time as the central line.

This way of analysing the currency trading charts is discovered by Bollinger in the 80s. According to Bollinger Bands the prices would generally remain between the two standard deviations of the moving average. So when the price reaches towards any one of the upper or lower band then one can expect the market to take a reverse direction and that can be an indication for the traders to take a position in the currency market and earn profits. One can also find out how volatile the market is by looking at the upper and lower bands, wider the two lines higher is the volatility.

Following are two of the most popular ways how these bands are being used on currency trading charts:

1.)    Detection of overbought and oversold markets

Assuming that the prices should remain between the upper and lower bands, if the price moves above the upper line or moves below the lower line then a trader can take opposite position since it denotes that there was either heavy selling or heavy buying in the market. And the traders would square off their position when the market price reaches or comes near to the central line.

2.)    Detection of contraction and predicting breakout

As we already discussed earlier that the two standard deviation lines may be closer or away from each other based on volatility in the market. So if the distance between these two lines is not much then it can be termed as contraction. Some traders see this as an indication that a big breakout is expected and puts a buy as well as sell order when the market is outside the bands.

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