Bollinger Bands

Tag: xbt, bitcoin price, tech analysis, Bollinger Bands, standard deviation, upper band, lower band, middle band, bullish and bearish signals

What Are Bolliner Bands?

Bollinger Bands are a technical analysis tool developed and copyrighted by famous technical trader John Bollinger. Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price. There are three lines that compose Bollinger Bands: A simple moving average (a middle band), an upper band, and a lower band. Because the distance of the bands is based on standard deviation, they adjust to volatility swings in the underlying price. Bollinger Bands identify a cryptocurrency’s high and low volatility points. It is used to figure out the oversold or overbought signals in the finance market.

The time period of the middle band is usually 20 days, so it is a 20-day moving average; the upper band and lower band are the standard deviations of the cryptocurrency being studied. The standard deviation is a measure of price volatility, when the markets become more volatile the bands widen while during less volatile periods, the bands contract. That is to say, the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.

Calculation

  1. Calculate a simple moving average.
  2. Calculate the standard deviation over the same number of periods as the simple moving average. For the upper band, add the standard deviation to the moving average. For the lower band, subtract the standard deviation from the moving average.

What Bollinger Bands tell?

The Squeeze

When the bands get closer, constricting the moving average, it is called a squeeze. It signals a period of low volatility and is considered to be a potential sign of future increased volatility and possible trading opportunities. Conversely, when the bands separate wider, there is more likely the tendency of a decrease in volatility and the greater the possibility of exiting a trade. It is worth noting that the above conditions are not trading signals because the bands give no indication when the change might occur or which direction the price could move in the future.

Breakouts

Most price action takes place between the two bands. Any breakout above the upper band or below the lower band is related to a major event.  The breakout is also not a trading signal. It provides no clue as to the direction and extent of future price movement.

Limitations of Bollinger Bands

It is suggested by John Bollinger that traders should use this indicator with two or more other non-correlated indicators that predict more direct market signals. And it is a risky behavior to only trade with this indicator,like moving average divergence convergence(MACD), relative strength index(RSI) since the Bollinger bands care more about the price and volatility while ignoring other relevant information.

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