• Posted by: myke

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When the signal line of the RSI indicator falls below 30, the asset is ‘oversold,’ meaning it can start the uptrend in the nearest future. The idea of this indicator was to combine trend strategies with volatility and oscillator indicators. The bands are indicating the current price direction taking into account the current price volatility.

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Bollinger Bands work best when the middle band is chosen to reflect the intermediate-term trend, so that trend information is combined with relative price level data. To calculate bands, you should first identify a simple moving average. Secondly, you need to add or subtract a specified number of standard deviations from the simple moving average.

It applies to every financial asset available for trading on the markets. If you understand volatility, you’re a step ahead in your trading career. The Bollinger Bands indicator will help you interpret market volatility and extract value from it. But suddenly, the price closes a small bullish candle and continues with a sideways move and the two Bollinger Bands start moving toward each other. The momentum indicator starts increasing which may mean that this is the end of the bearish trend. The basic signals of the momentum indicator are very simple.

Adjusting the Settings

John Bollinger is one of the world’s most famous technical analysts. If you don’t know, technical analysis is a discipline that aims at forecasting future prices using only past price behaviour . A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal. That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions. Bollinger Bands provide a relative definition of high and low.

TradingWolf and the persons involved do not take any responsibility for your actions or investments. 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 or oversold . 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.

  • The idea is to use daily charts, and when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase.
  • Other indicators such as support and resistance lines might prove beneficial when a trader decides whether or not to buy or sell in the direction of the breakout.
  • That is why it is said it provides relative high & lows or support/resistance.
  • Note that narrowing bands do not provide any directional clues.
  • The position of these bands provides information on how strong the trend is and the potential high and low price levels that may be expected in the immediate future.

Instead, it can https://forexanalytics.info/ market traders with necessary information regarding the potential price volatility of an asset. In practice, Bollinger Bands represent one of the most potent and reliable trading indicators in the world of technical analysis. This indicator is mainly used to interpret the strength of a trend and identify market tops or bottoms.

Overbought and Oversold

Scalpers using https://day-trading.info/ Bands configure them with the default settings of a 20 Period Simple Moving Average and a Standard Deviation Multiplier of 2. The main change is that they apply this bollinger bands on a 5 minute candlestick chart . Of course, Bollinger Bands trading should not be thought of as a stand-alone system.

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But these swings can also help a https://forexhistory.info/r to assess the profit targets. During a downtrend, traders tend to purchase stocks with the increase of selling activity among other sellers. When volatility is low, you see the bands close to each other. When the bands are tight, this means the market is currently quiet and not many people are taking part. In such cases, you are very likely to find a consolidation on the chart. The price will move sideways and an overall trend will be missing.

However, using only the bands to trade is a risky strategy since the indicator focuses on price and volatility while ignoring various other relevant information. One of the essential tools used for technical analysis in securities trading is Bollinger Bands. Its primary incentive is to help the trader establish a trend’s direction, spot potential reversals, and monitor volatility. In trading, market participants use two contrasting types of analysis. Fundamental analysis examines market news, economic/social/political forces, and earnings data to predict how an asset’s price will move. Technical analysis, on the other hand, uses charts and various technical indicators to forecast market conditions.

Bollinger BandWidth

Information on both was hard to obtain in those days but I persisted; with the help of an early microcomputer I was able to make some progress. At the time we used percentage bands and compared price action within the bands to the action of supply/demand tools like David Bostian’s Intraday Intensity. A touch of the upper band by price that was not confirmed by strength in the oscillator was a sell setup and a similarly unconfirmed tag of the lower band was a buy setup. If you were bullish, you had a natural tendency to draw the bands so they presented a bullish picture, if you were bearish the natural result was a picture with a bearish bias.

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During periods of low volatility, the bands are narrow, while Bollinger Bands expand drastically during periods of high volatility. The consensus is that when the price reaches the upper band, it is considered as overbought, and when the price approaches the lower band, it is deemed to be oversold. To fix this, a trader can look at the overall direction of the price and then only take trade signals that align them with the trend.

Use these ideas to augment your trading style, risk-reward preferences and personal judgments. Click here for a chart of the S&P 500 ETF with Bollinger Bands and the BandWidth indicator. The Bollinger Band Squeeze occurs when volatility falls to low levels and the Bollinger Bands narrow.

Bollinger Bands summed up

There are two main signals in this strategy that you should always keep in mind. The best way to find the entry point is to look at the position of the price in relation to the lower band. Once they meet, you can exit the market and look for other opportunities.

Bollinger bands are commonly used as a “reversion to the mean” indicator. If price is below the Bollinger bands, it might be taken as an indication that price is currently too low. Likewise, if the price is above the bands, price may be interpreted as being too high.

The author of the indicator looked for an effective way to select the interval for a long time. The very first mention of a tool similar to Bollinger Bands dates back to 1960. Brokerage services in your country are provided by the Liteforex LTD Company (regulated by CySEC’s licence №093/08). From equities, fixed income to derivatives, the CMSA certification bridges the gap from where you are now to where you want to be — a world-class capital markets analyst. It’s not advisable to base yourself solely on Bollinger Bands in order to make trading decisions. John Bollinger explains that Bollinger Bands are not a standalone indicator and should always be used in combination with others.

Limitation of Relying on this indicator alone

But take a look at how slow it was in showing the trend change. By default, the overlay uses a 20-period SMA and sets the bands 2.0 standard deviations above or below the SMA. These parameters can be adjusted to meet your technical analysis needs.

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Since the SMA is essentially an average and the price keeps swinging from one side of the SMA to the other, you are bound to end up with a profit. This strategy can also be used in times of very low volatility. Bollinger bands help us to understand the volatility of an asset. When the market is strongly bullish , due to their inherent properties, the Bollinger Band envelope will widen dramatically.

At the same time, Alligator does not show any crossings between its lines , which indicates an early sign of an overbought asset and a possible trend change. A value greater than 1 is possible if the price goes above the upper band. In this case, it will be a signal either about an overbought asset, or about a change from a bearish to a bullish trend.

Then after a while, another low is established, and this time it is above the lower band. The standard deviation measures how spread out numbers are from an average value for a given data set. The variance itself is the average of the squared differences of the mean . It is a mathematical measurement of average variance and appears prominently in economics, statistics, finance, and accounting.


When that happens, a cross below the 20-day moving average warns of a trend reversal to the downside. A stock may trade for long periods in a trend, albeit with some volatility from time to time. To better see the trend, traders use the moving average to filter the price action.

Once volatility increases, the lines, and price start moving again, which can help with trend analysis again. On the other hand, bounces are based on the premise that price tends to get drawn towards the average. Since the upper and lower bands essentially become our support and resistance levels, it’s not so hard to predict the next possible price move.

Author: myke