Statistical charts are not limited to school activities; they are also used in trading. In fact, John Bollinger used statistics to figure out the relationship between lows and highs, called the Bollinger bands. The Bolinger Bands chart focuses on financial commodities, automated trading systems, technical analysis, and many more.
Bollinger bands apply to several cases and trading situations because it was discovered in the 1980s. John combined knowledge and trading backbone to make functional changes over the decades. Yes! Bollinger bands aged over 4 decades and are still very useful. While reading this, you will learn about John Bolinger, how he discovered his band concept and its application to trading.
Bollinger bands are the concept of simple moving averages (SMA) and volatility: they display the relationship between these two in a two-dimensional chart. The moving averages are considered envelopes displaying minimum and maximum moving averages; conversely, the volatility simply shows the envelope’s width (or intensity). In other words, the Bollinger bands show the deep relationship between volatility and moving averages in a single view on a two-dimensional chart.
The price envelope (moving averages) shows the range or levels (upper and lower prices). The simple average moving prices are shown on the Bollinger bands by plotting the standard deviation level against the prices. The standard deviation level stays above and below in the plot. Volatility comes into play because the standard deviation is the basis of the distance of the bands; thus, volatility flows in the underlying price.
Bollinger bands apply two factors: period and standard deviation, to figure out the main deal during trading analysis. The standard deviation comes at a value of 2, and the period comes at a value of 20. The 2 and 20 combinations are customizable. Remember that your variations depend on the present movement and findings.
Bollinger bands figure out price behavior based on relativity: it simply shows the price low or high behavior at a particular time. Furthermore, Bollinger bands are more effective when the price behavior (low or high) combines with the moving average; that is, (high or low price) + (moving average) = Bollinger bands.
Three lines form the Bollinger bands: the low band, middle band, and high band. The low and high Bands come from the standard deviation, and the middle band is the simple moving average. The standard deviation comes as (+/-) and widely depends on your variations – naturally, 2 standard deviations (+/-) derived from a 20-day simple moving average or on your scale.
Lastly, Bollinger bands are never applied alone: they serve as a confirmation signal for other indicators, as the case may be. You should try and confirm your basis/conclusion if at all you want to use the Bollinger bands for other reasons.
How do you read Bollinger bands?
You must first calculate the Bollinger bands before you can read the Bands. Interpretation and application come right after reading the Bands. Thus, you should learn how to correctly calculate, read, interpret, and apply Bollinger bands. You are welcome because this article teaches all of these; it further talks about the purpose of Bollinger bands and the strategic move behind the Bands. Happy reading!
How to calculate Bollinger bands
How to use the formula
First, figure out the simple moving averages – you may apply the 20-day moving average based on the concerned security. The first data point is observable from the 20-day moving average; with this, you can deduce the average closing prices for the initial 20 days.
Then, proceed to figure out the next data point. Take note; the next data point falls the initial price – sum up the price on day 21, calculate the average, and continue.
The next thing is to calculate the standard deviation: measuring the average variance; that is, the square root of the variance = standard deviation. The purpose of standard deviation is to get how far/spread numbers are distanced from the average value.
Then, multiply the standard deviation by 2; in both cases, add and subtract the value from each point along the simple moving average – this is the upper and lower Bands.
How to read Bollinger bands
A good read of Bollinger bands shows when the US stocks are likely to be oversold, how to sell or buy, and investment strength (based on a short term).
The lower band indicates the moving average low, and the upper band indicates the moving average plus a standard deviation. The relationship between price and the band shows if the price is low or high: the price is relatively low if it is near the lower band and relatively high if it is near the upper band. Confirming the relationship and interpretation/conclusion with other information/indicators is important – this is necessary for smooth, safe trading.
How do Bollinger bands work?
A sharp price move in either direction when the bands tighten, mostly at low volatility. The major effect of this is an increase in trending moves. You should watch out for false moves in the other direction; it often turns before the usual trend begins.
When the bands differentiate with an abnormally large value, volatility increases with an unending trend (mostly). The amount of separation is important to pinpoint the level of volatility: you can tell if volatility is occurring or about to occur simply by looking at the separation between the bands.
Prices touch between Bands with the envelope – the envelope is like a space for the price to behave – the behavior, in turn, shows several hints and gives traders future predictions. Bands give important hints to traders when prices move from one band to the other with the envelope. The swings are useful tools to pinpoint potentials profits markers in this case. For instance, the upper band is the profit target if the prices move off the lower band and then cross above the moving average.
Strong trends are characteristics when prices move exceedingly high or close to a band envelope for extended periods. During this point, you may want to use a momentum oscillator or additional research to determine the appropriate approach for profit safeguarding. Bollinger bands give you all the basics to secure the profits; however, adding more verification means easing the route and securing your profits from your ends. Genuine profits are more rewarding than gambling: verify your actions even if you are sure you are doing it right with Bollinger bands.
An extended strong trend continuation is a property observable when the price goes out of the Bands. What could have been the reason for prolonged strong trend continuation? Well, finding the reason for usual and unusual things when you trade is a better way to become a great trader.
Purpose of Bollinger bands
All traders widely use the Bollinger bands strategy (professional and at-home traders). The reason is the versatility of entering a trade’s deepest part. A professional trader considers many things before making the simplest decision on a trade because the least decision could be a success or misfortune. Thus, all moves are important in trading.
And this is why Bollinger bands are never used alone. Even though the indicator has many advantages and is easy to use, you should not rely on it alone.
Bollinger bands are used in many areas of trading: used as price and volatility monitor, buy and sell signals, trend following tool, determining overbought and oversold, and monitoring breakouts. These are crucial areas of trading. You trade with confidence and harvest outstanding returns if you know one or more of these factors. Here is how:
Using Bollinger bands as price and volatility monitor
Bollinger bands serve as price volatility monitors if you check the bands’ versus price action. For example, the Bollinger bands communicate certain values when they narrow or broaden toward price action. Decrease volatility may occur if you notice that the Bollinger bands move closer together (that is, get narrower).
The best approach is to confirm your insight with other technical indicators: you may save a better day ahead if you view the Bollinger bands with this approach aside from deducing your values using the Bollinger bands alone.
Another case is the Bollinger band “squeeze.” The squeeze occurs when the volatility reaches a relatively low value compared to the recent price action. The squeeze may suggest several other things aside from low volatility. For example, increased volatility often follows a squeeze. Upside or downside stock may be coming in the nearest future if this happens. Thus, the squeeze tells more than just volatility; it predicts stock behavior. You will learn more about the squeeze strategy as you read.
Using Bollinger bands as buy and sell signals
Some traders use Bollinger bands alongside other indicators to determine when to buy or sell. Signals are hints and not always accurate; however, you can narrow the possibilities to be more effective if you can work with more values simultaneously. For example, you should note that Bollinger bands were not introduced as a “one-man army” in this article. Bollinger bands do not work alone because you need more than this indicator to find the final target from your research.
Combining the “high and low” with the price and band interactions gives you insight into the time to sell or buy values. For instance, some traders take the Bollinger bands’ support and resistance levels as a sell and buy signal, respectively. The resistance level is when the stock moves through the upper band; traders often buy. Conversely, some traders take the Bollinger bands support level as a sell signal. The support level is the time the stock moves below the lower band.
The crucial factors here are the price behavior and position of the bands. What is the bands’ position when the prices move across them? These are important to the conclusion you may give to your research. Another example is when stocks are undervalued – some traders can sell or buy at this point. Traders see a sell signal when the undervalued stocks are on a short-term break below the lower part.
Using Bollinger bands as trend following tool
Bollinger bands are contained three lines – the upper, middle, and lower bands. The center band is a moving normal, and the expert picks its boundaries. The upper and lower bands are situated on one or the other side of the moving average.
The trader decides on the number of standard deviations. The quantity of standard deviations decides the distance between the center Band and the upper and lower bands.
The place of these bands gives data on how solid the trend is and the possible high and low price levels that might be normal in the short term. Thus, giving meaning to the uptrend and downtrend via Bollinger bands. Here is how to interpret it.
Bollinger bands and uptrend
Bollinger bands can be utilized to decide how firmly a resource is rising and when it is possibly switching or losing strength. If an uptrend is sufficient, it will arrive at the upper band consistently. An uptrend at the upper band shows that the stock is pushing higher, and traders can take advantage of the chance to settle on a purchase choice.
Assuming the price pulls back inside the uptrends, it stays over the center band and moves back to the upper band, which shows a ton of strength. For the most part, a cost in the uptrend shouldn’t contact the lower band; if it does, it is a sign that the stock is losing strength.
Most traders intend to benefit from areas of strength for reversal happens. When a stock does not arrive at other peaks, traders often monitor the asset to reduce a switch trend’s misfortunes. Traders screen the uptrend to know when it shows strength or weakness, and they utilize this as a sign of a potential trend reversal.
Bollinger bands and downtrend
Bollinger bands can be utilized to decide security and when it may turn around to a potential gain trend. In a solid downtrend, the cost will run along the lower, showing that selling movement stays strong. However, assuming the value neglects to contact or move along the lower band, the downtrend might be losing force.
When there are cost pullbacks, and the cost stays beneath the center band and afterward moves back to the lower band, it means a ton of downtrend strength. In a downtrend, costs shouldn’t break over the upper band since this would demonstrate that the trend might be switching.
Numerous traders abstain from trading during downtrends, other than searching for a valuable chance to purchase when the trend changes. The downtrend can keep going for short or long lengths. Traders should distinguish any indication of downtrends sufficiently early to safeguard their speculations. Assuming that the lower bands show a consistent downtrend, traders should try not to go into long trades that may end unrewardingly.
Bollinger bands and double tops/bottoms
Bollinger bands use W patterns to distinguish W-Bottoms when the subsequent low is lower than the principal low however holds over the lower band. It happens when a low response structures near or beneath the lower band.
The cost then, at that point, pulls back towards the center Band or higher and makes another cost low that holds the lower band at the point when the cost moves over the high of the primary pullback and shows that the cost will probably ascend to another high.
M-Top is like a double-top graph design. An M-Top happens when a response moves near or over the upper band. The cost then, at that point, pulls back towards the center band or lower and makes another cost high, yet doesn’t close over the upper band.
Using Bollinger bands to monitor breakouts
Execute a trade in the course that the price penetrates the band. Enter a long position if the price penetrates the top band, and enter a short assuming the price penetrates the lower band. This is the best-executed couple with the band position, which could signify that the market is preparing itself for a huge move.
Bollinger bands strategy
The overbought and oversold strategy
A typical methodology while utilizing Bollinger bands is recognizing overbought or oversold economic situations. Costs may have fallen excessively due to bounce when the price breaks underneath the lower band of the Bollinger bands. Then again, the market might have been overbought and due for a pullback when the cost breaks over the upper band.
Involving the bands as overbought/oversold markers depends on the idea of mean reversion of the price: when the price strays considerably from the mean or normal, it returns to the mean in the long run.
In range-bound markets, mean inversion techniques can function as price travel between the two bands. In any case, Bollinger bands don’t necessarily give precise trade signals. During a solid trend, for instance, the trader risks putting exchanges on some unacceptable side of the move if the pointer can streak overbought or oversold flags too early.
To assist with curing this, a trader can take a gander at the general course of price and afterward take exchange flags that adjust the investor to the trend. For instance, if the trend is down, possibly take short positions when the upper band is labeled. The lower band can, in any case, be utilized as an exit; however, another long position isn’t opened since that would mean conflicting with the trend.
Bollinger bands squeeze strategy
Recall that the squeeze occurs when the volatility reaches a relatively low value compared to the recent price action. The squeeze may suggest several other things aside from low volatility. For example, increased volatility often follows a squeeze. Upside or downside stock may be coming in the nearest future if this happens. Thus, the squeeze tells more than just volatility; it predicts stock behavior.
A squeeze strategy is another procedure to use with Bollinger bands. A squeeze happens when the cost has been moving forcefully and begins moving sideways in a tight consolidation.
A trader can outwardly distinguish when the cost of a resource is combined because the upper and lower bands draw nearer together. This implies the unpredictability of the resource has diminished. After consolidation, the cost frequently takes a bigger action in one or the other heading, preferably on high volume. Extending volume on a breakout indicates that traders decide with their cash that the price will keep moving in the breakout heading.
The trader trades the resource separately when the cost gets through the upper or lower band. A stop-loss request is generally put external the consolidation on the contrary side of the breakout.
Bollinger bands crypto
Standard deviation estimates values and their mean, making it a mark of unpredictability. As the bands extend, the market becomes more unstable (price creates some distance from the lagging). As bands contract, it shows that the market is becoming less unpredictable.
The principal way traders use Bollinger bands in cryptocurrency is to trust that the market will move toward the upper or lower bands before making a move. As the cost exchanges nearer to the bands, the chance becomes more noteworthy that the market is overbought (upper band) or oversold (lower band).
Consequently, the mean inversion trader will execute a short when the cost contacts the upper band and a long when the cost contacts the lower. Involving Bollinger bands in cryptocurrencies is suggested over mean inversion trades, as digital currencies are unpredictable and usually trend for extended periods.