Bollinger Bands are a well-known mechanism of technological review, which allows us to determine whether the unit cost of a device is considered significant or low on a comparative basis. Invented by John Bollinger in the 1980s, Bollinger Bands have all chance to be used to a single line of different economic devices. They include indices, monetary units, and promotions.
As a technological indicator, Bollinger Bands demonstrates if the mechanism is located in the overbought or oversold condition. If the cost of the device moves to the upper band, in this case, this, as well as the principle, is considered an overbought signal. If the cost moves to the lower band, then this, as well as the principle, indicates oversold. They also have all chances to be used for volatility score. In seasoned trading stages, the bands narrow. In the presence of volatile cost movement, the bands widen. Bollinger Bands are considered one of the more frequently used devices of technological consideration. In combination with other indicators, they can help traders to get income from overbought and oversold circumstances in trading.
What are Bollinger Bands?
Bollinger Bands is an industrial indicator that can be used to establish overbought or oversold conditions in economic bazaars, as well as for volatility score. Bollinger Bands is formed from 3 directions in the trader’s chart. The average direction of the pointer is the usual moving median (SMA) of the instrument value, which implies the average role of the value due to a specific period. As a rule, this is a 20-day interval. Upper area – this SMA is the advantage of 2 usual differences. Bottom area – this SMA disadvantages 2 usual differences.
According to these two edges with the SMA are placed Bollinger Bands. Bollinger Bands looks like a package around the cost of the device. The width of the bands is due to the normal deviation. The normal deviation belongs to the volatility of the instrument value movement. As a rule, this coefficient is equal to 2.0.
Bollinger Band calculation formula
The period is the number of intervals that are included in the calculation of the Bollinger Band. The value (20, 2) means that the period and standard deviation are 20 and 2.0, respectively. For Bollinger bands with settings 20, and 2, the bands are calculated using the following formulas:
Upper band = 20-day SMA + (20-day standard deviation x 2)
Lower band = 20-day SMA – (20-day standard deviation x 2)
Bollinger Bands chart
How to use Bollinger Bands?
Bollinger Bands can be used in absolutely all timeframes, including weekly, daily, and five-minute charts. The options can be changed by different trading manners. If the cost of the device moves to the upper belt, this warning of its overbought. Equally, as a principle, traders try to realize if they believe that the mechanism is overbought. If the cost of the instrument moves to the lower belt, this is a warning of its oversold condition. Equally, as a principle, traders try to purchase re-exported significant documents.
Just as a commercial indicator Bollinger Bands are by no means flawless. They do not always provide strong signals. For this reason, to extract the most specific trader signals, it is better to use them together with other similar indicators of technological consideration. The number of such additional devices of technological consideration, which can be found in our barge Next Generation, include:
Moving averages
Moving ordinary is considered to be a common trader’s device. They are used by traders to establish the trend of rate changes. The moving mediocre shows the mediocre value of a significant document due to a specific period. The main principle of moving mediocre is that if the value of a significant document is located before the moving typical, in this case, the direction is increasing. If the value is further away from the moving typical, in this case, the direction is falling.
Moving common has all chances to be adjusted in various timeframes in connection with the trader’s strategy. There are also various types of moving mediocre. They include the ordinary moving mediocre (SMA) and exponential moving mediocre (EMA).
Stochastic indicator
The random pointer is yet the only other famous mechanism of technological consideration. They can be useful for modeling reversals of rate changes. Stochastics measure the impetus of value movement. As well as Bollinger Bands, probability indicators can help traders establish overbought and oversold levels.
Average true range
The Average True Range (ATR) is a technical indicator that measures volatility. It was originally developed for commodity analysis, but can also be applied to other instruments such as indices and stocks.
A security with a high level of volatility will have a higher ATR. Securities with low volatility will have a low ATR. Traders use ATR to determine entry and exit points. It can be a useful tool in combination with other trading indicators.
Keltner Channels
Keltner channels are volatility indicators similar to Bollinger Bands. The main difference is that in Keltner channels to establish the width of the bands, there is not the usual discrepancy, but a moderate real spectrum. In addition, the Keltner channels use the exponential moving mediocre as a typical direction.
Bollinger Bands strategy
There are a large number of trading strategies that traders use with the support of Bollinger Bands. Certain of the more common trading strategies that can help traders in bearish or bullish markets include:
Riding the bands
Almost all traders incorrectly believe that if the value of a significant document has touched the upper band, then it is necessary to disclose short views, or vice versa. However, such price movements should not be regarded as a warning to purchase or sale. Personally, according to themselves, the withdrawal of value from the boundaries of the bands is not considered a sign to enter the operation. This is associated with the fact that in the period of powerful upward or downward changes in the rate of value often have all chances to be within the bands.
Bollinger Band squeeze
This strategy uses the “bandwidth” indicator. The bandwidth is calculated according to the following composition:
Bandwidth = (lake role of the Bollinger band – natal role of the Bollinger band) / average role of the Bollinger band
The essence of this indicator is that in the presence of gaining the six-month minimum amount, traders have all the chances to wait for an increase in volatility. During this period, there is a squeeze, as well as the cost of the device, can significantly shift.
What are the best Bollinger Bands settings?
Bollinger Bands can be adjusted to different timeframes and adapted to different trading strategies. For example, the bands can trace movements in hourly, daily, weekly, and monthly charts. A trader who studies long-term movements in the value of the instrument can choose the setting of Bollinger Bands in the monthly chart.
In contrast, a short-term day trader can choose to set the Bollinger Bands in the five-minute chart. In the very process, there is no single rational timeframe to use Bollinger Bands. The selection of the timeframe depends on the trader’s strategy.
Bollinger Band patterns
Double bottoms
In the case of a “double bottom”, the value of the instrument rapidly decreases by a significant amount and also locks behind the boundaries of the lower Bollinger band. Then there will be a temporary bounce upward to the typical band. Also, in the end, the cost goes down again, this time in the smallest size, and also locks from inside the lower band.
This form shows in this case that the downward influence has weakened. A transformation from sellers to consumers takes place. Often the corresponding value movement is a very significant upward movement from the 2nd lowest quantity. Traders have all the chances to price large views by targeting the mediocre or upper band.
Reversals
In the strategy of reversal of the rate change traders find the properties of this, that the price propensity according to the device will unwind. For example, the cost can rise before the upper Bollinger band, but close near the minimum amount of the interval. This can be a signal that in the nearest possible direction will spin. The trader can take a brief transaction, targeting a mediocre band. In this way, the cost can go down further than the lower Bollinger band but cover near the maximum because of the interval. This will indicate that the trader can take a long trade, targeting a mediocre band.
Bollinger Band trading system
Our Next Generation trading platform comes with a wide range of technical analysis indicators, including Bollinger Bands, Keltner channels, moving averages, and others. You can combine indicators on charts and use our drawing tools to mark trend lines, support, and resistance levels, as well as potential points of purchase and sale. Check out our collection of trading tutorials on the platform to get started.
The application Bollinger Bands
Our next-generation platform is also available for on-the-go trading from mobile or tablet devices. We offer trading using Bollinger Bands for charts and technical layouts optimized for mobile devices. Learn more about our mobile trading app.
How to interpret Bollinger Bands?
Bollinger Bands are considered a productive indicator of technological consideration, but they have their limits. Bollinger Bands are based on a light moving typical according to the device that applies the past places of information. As a consequence, the bands constantly respond to the movement of value but do not give a forecast of it. In other words, Bollinger Bands are considered fast, not futurological, and they are often called not advanced, but lagging indicators.
Bollinger Bands also have a chance to provide erroneous signals. For example, a false breakdown is made if the cost of the device flows through the place of entry into the operation. This is considered a signal for a deal, but then the cost will return in a different course. This leads to a profitless transaction.
In the presence of trading with the use of Bollinger Bands traders must realize that typical options are not suitable for absolutely all strategies. Long-term position traders can choose to use the largest number of stages and also the largest usual discrepancy, in this case, the period as well as day traders and swing traders can choose the smallest number of stages and also the smallest usual discrepancy. According to this circumstance, the Bollinger Bands indicator should be used in combination with other indicators and instruments as well as a part of a single trading strategy.
Summary
In general, Bollinger Bands are considered a necessary device for technological consideration. Bollinger Bands are used to consider the volatility and power of rate changes, which is particularly useful in the presence of rapid invention and closing trades in volatile trading, for example, the presence of scalping in Forex trading. Bollinger Bands also have all the chances to help in modeling reversals of rate changes. Traders must keep in mind that the Bollinger Bands are based on multi-meaning data. For this reason, the bands respond to the movement of value, but do not anticipate the upcoming cost movements. In the presence of trading with the use of Bollinger Bands, it is always necessary to take into account the chance of using risk management money.