Bollinger Bands and ATR

Bollinger Bands

The default is a 20-period average with bands two standard deviations away. Statistically about 95 percent of closes fall inside the bands, so a close outside is unusual, though not a reversal signal by itself; in a strong trend price walks along the outer band. The more useful reading is width: a squeeze, when the bands narrow to their tightest in months, often precedes a large move, because volatility cycles from quiet to loud.

ATR

The true range of a period is the largest of the high minus the low, the high minus the previous close, and the previous close minus the low, so gaps are included. ATR averages that over 14 periods. On a daily EUR/USD chart it might read 0.0070, meaning the pair moves about 70 pips a day on average. That number is the unit of noise, and everything about stop placement follows from it.

Using ATR

• Stops: place a stop at least one ATR from the entry on the trade's timeframe, often 1.5 to 2 ATR, so that ordinary noise cannot reach it.
• Position size: with the stop set in ATR terms, size the position to the risk budget; the position size calculator accepts a stop in pips.
• Targets: a target of two or three ATR is a move the market makes regularly; ten ATR is not.
• Comparing pairs: ATR as a percentage of price lets you compare volatility across instruments.

A caution on the bands

The bands are not levels. Price touching the upper band in an uptrend is normal, not a sell. The bands tell you about volatility and relative position; support and resistance still come from structure.

Key takeaways

• Bollinger Bands show price relative to its recent range and widen with volatility; squeezes precede moves.
• ATR measures average range and is the unit for stops and targets.
• Set stops at 1.5 to 2 ATR and size to the stop.
• Neither indicator is a support or resistance level.