Even though there are several technical indicators a forex trader can use to determine the market state and predict movements, the Bollinger bands are certainly one of my favorite. When used correctly with a combination of other technical indicators, the Bollinger bands are actually very effective and can help you stay profitable trading foreign currency pairs.
The Bollinger bands are basically used to measure market volatility. You will see two lines, or bands, drawn on your chart window when you activate this technical indicator; these two lines are the Bollinger bands, depicting market volatility almost accurately. If the two bands are close to each other, the market volatility is relatively low. If the two bands are separated by a huge gap, on the other hand, you can expect market volatility to be quite high.
When used properly, the Bollinger bands can actually help you open positions before the market actually moves; of course, this depends on just how quick you can react to market movements and other technical indicators you use to confirm the move.
The price of a foreign currency pair tend to return to the center of the Bollinger bands, so you can use this technical indicator to predict movements indeed. If you see the price hitting the top band, for example, you can expect the market to move downwards or start a reversal; you can then predict the strength of that movement by seeing the distance between the two Bollinger bands and signs from other technical indicators you might be using.
