The Bollinger Band theory is designed to depict the volatility of a price. It is quite simple, being composed of a simple moving average, and its upper and lower "bands" that are 2 standard deviations away. Standard deviations are a statistical tool used to contain the majority of movement or "deviation" around an average value. Bear in mind that when you use the Bollinger Band theory, it only works as a guide, andshould be use with other indicators.

Normally, we use the 20-Day simple moving average and its standard deviations to create Bollinger Bands. Strategies some investors use include; shorter- or longer-term Bollinger Bands depending on their needs. Shorter-term Bollinger Bands strategies (less than 20-Days) are more sensitive to price fluctuations, while longer-term Bollinger Bands (more than 20-Days) are more conservative.

The Bollinger Band theory will not indicate exactly which point to buy or sell. It is meant to be used as a guide with which to gauge an instrument’s volatility.

As for how we use the Bollinger Band theory, here are a couple of guidelines: History shows that a currency pair usually doesn't stay in a narrow trading range for long, as can be gauged using the Bollinger Bands. Strategies include relating the width with the length of the bands.

The narrower the bands, the shorter the time it will last. Therefore, when a currency pair starts to trade within narrow Bollinger Bands, we know that there will be a substantial price fluctuation in the near future. However,we do not know which direction the pair will move, hence the need to use Bollinger Bands strategies together with other technical indicators. The wider the Bands are, the more volatile the price is, and the more likely the price will fall back towards the moving average.

When the actual currency pair price moves away from the Bands back towards the moving average, it can be taken as a signal that the price trend has slowed, and will move back towards the moving average. However, it is common for the price to bounce off the Bands a second time before a confirmed move towards the moving average.

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