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How to Use Bollinger Bands + Historical Volatility Indicator for Measuring Market Risk?

Last Updated on March 15, 2025 by Arif Chowdhury

Are you feeling lost in the sea of market indicators?

Do you wonder how to gauge market risk effectively?

As a seasoned Forex trader since 2015, I’ve faced these questions firsthand.

Let’s dive into how Bollinger Bands combined with the Historical Volatility Indicator can empower your trading strategy.

These tools are not just for show; they can seriously enhance your understanding of market conditions.

Let me break it down for you.

Understanding Bollinger Bands

Bollinger Bands consist of three lines:

  • Middle Band: This is the simple moving average (SMA), usually set to 20 periods.
  • Upper Band: This is the SMA plus a multiple of standard deviations (commonly 2).
  • Lower Band: This is the SMA minus the same multiple of standard deviations.

These bands expand and contract based on market volatility.

When the market is volatile, bands widen; during quiet periods, they contract.

Key Takeaway:

  • Widening bands signal increased volatility.
  • Narrowing bands indicate decreased volatility.

The Historical Volatility Indicator

The Historical Volatility (HV) indicator measures the dispersion of price movements over a specific period.

It’s like a report card for how erratic a currency pair has been.

  • Higher HV means more price fluctuations and, consequently, higher market risk.
  • Lower HV suggests a more stable market.

Stat Fact: Many traders find that currency pairs with a High Historical Volatility often correlate with significant market events or announcements.

Using the Two Together

Now, why combine these two indicators?

When used together, they provide a comprehensive view of market conditions.

Here’s how:

  1. Confirm Trends: If the price touches the upper band while HV is high, it could signify a strong upward trend.
  2. Identify Reversals: A price touching the lower band amid low HV might indicate a potential reversal.
  3. Measure Risk: A sudden increase in HV while the price is near the bands can signal increased market risk.

My Trading Strategy

I’ve developed a unique trading strategy that incorporates these indicators.

My approach uses Bollinger Bands and Historical Volatility among other techniques.

I also created a portfolio of 16 sophisticated trading bots that leverage this strategy.

These bots are designed to trade across four major currency pairs: EUR/USD, GBP/USD, USD/CHF, and USD/JPY.

Each bot is strategically diversified to minimize risk and maximize returns.

This diversification is crucial in reducing correlated losses.

Why does this matter?

When one bot may struggle, others can still perform well, creating a robust trading portfolio.

The Power of Diversification

Imagine having 3-4 bots for each currency pair.

That’s a multi-layered approach to risk management.

  • This system significantly enhances overall profitability.
  • It minimizes the likelihood of simultaneous losses.

I’ve backtested these bots for 20 years under harsh conditions, and the results speak for themselves.

They’re designed for long-term trading, targeting 200-350 pips.

This means they thrive in stable market conditions, making them reliable partners in your trading journey.

And the best part?

I’m offering this EA portfolio for FREE.

If you want to see how these bots can transform your trading, check it out here: 16 Trading Bots Portfolio.

Best Brokers to Use

Now, let’s talk about where to execute these trades.

Using the right broker can make all the difference.

I’ve tested various brokers, and here are my top recommendations:

  • FBS offers tight spreads starting from 0.7 pips and instant withdrawals.
  • XM has zero costs, meaning no swap fees or commissions.
  • TickMill provides fast execution and a risk-free welcome bonus.

When you choose a broker, consider these factors:

  • Execution Speed: Faster execution can save you money.
  • Spreads: Lower spreads mean better profit margins.
  • Customer Support: Good support can save you headaches.

You can check out my recommended brokers here: Best Forex Brokers.

Conclusion

Using Bollinger Bands combined with the Historical Volatility Indicator is a powerful way to measure market risk.

This strategy can help you make informed trading decisions.

And remember, my 16 trading bots are designed to implement these strategies effectively.

If you’re serious about elevating your trading game, don’t miss out on the chance to use this FREE EA portfolio.

With the right tools and brokers, you can navigate the Forex market with confidence.