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Bollinger bands

Bollinger bands

6 min reading

In order to be successful as a trader you have to use technical analysis tools. One of these is Bollinger bands.

Bollinger bands

Bollinger bands

The financial markets cannot exist without technical analysis. One of these indicators is Bollinger bands. You can determine the volatility of a particular instrument when you use Bollinger Bands.

History

American analyst John Bollinger, who set out in 1984 the Bollinger Bands. He also created his own system for analyzing and calculating investments. It took him about seven years, but Bollinger finally presented his system to the investment and trading community in the early 1990s. His indicator quickly gained popularity among market participants, was adopted by many traders and is still in use today. John Bollinger is the current owner of the financial firm Bollinger Capital Management inc.

What are the Bollinger Bands?

The creator of this indicator is John Bollinger, who was a technical analyst. The Bollinger Bands indicator is a part of standard popular trading terms and consists of three lines that measure the current volatility of the market. In the standard settings mode, the service is used with a plotting period of 20, that is, moving averages take into account the indicators of twenty quoted candles for calculating moving averages on the chart and a root-mean-square shift 2. The last indicator is needed to calculate price divergences from the average values ​​for the market evaluation period. Basically, it is displayed on top of the price chart. 

Bоllinger Bands help you to estimate how the price is positioned in relation to a normal trading range. The indicator lines are a moving average. The asset is considered full and it is threatened with a fall if the price is close to the upper line. If the price approaches the lower line, then the asset is undervalued and may grow. When the price has broken the upper or lower line, in this case, it is an abnormal jump, and the price is towards the central or opposite indicator line. The indicator does not give trading signals if the price chart fluctuates between the lines.

The two extreme lines of Bоllinger Bands are overbought or oversold zones. And the distance between them indicates volatility: the larger it is, the higher the volatility, and if less, then vice versa. The higher the time period, the more reliable the indicators are. Like any other trend indicator, Bollinger Bands perform better during times of strong uptrend or downtrend. 

How to use it on bit4you

Bit4you trading platform offers you to practice with Bollinger Bands on its Demo mode first.  If you are confident enough, then go into real trading with bit4you graphs that show Bollinger Bands. There you can see how  this technical indicator works on the chart below.

In a lateral trend, there will be a large number of signals, but many of them will be false.

The technical indicator Bollinger Bands is popular because it can be used both in trend movements and in horizontal corridors. It also reacts to volatility, which is very important in trading. And in order for its efficiency to increase, you do not need to use the same indicator period on all timeframes and instruments. When all Bollinger Bands have a horizontal direction then the position is accumulating. And you can work from the bottom to the top Bollinger Band, not paying attention to the midline. But this should only be done when the corridor is not very narrow. It is also important to work in the direction of the trend preceding this corridor. On the Bollinger’s Bands or when the price is way out of the line, at those points it is best to take a fix, but not to trade in the opposite direction to the trend. As soon as the price moves (1-3 bars) below the middle line in an uptrend (higher in a downtrend), it is the first indication that the trend is ending and a new corridor (balance) is coming soon. Also, another interesting interpretation of the readings for trading on the Bollinger is a combination with another technical indicator such as RSI.

Formula

Bollinger lines are made up of three parts: The simple moving average is represented by the middle line (SMA).
The upper line is the SMA + 2 standard deviations to determine the deviation from the middle band, allowing the upper and lower bands to diverge and converge based on price volatility.
The final result is SMA – 2 standard deviations.

Each time frame and instrument has its own optimal period, which will most often interact with the price. It is better to use the indicator in combination with other methods of analysis to minimize the number of false positives. Without proper management of funds, no indicator can guarantee a profit.

Conclusions