One of the most popular strategies among traders and investors is Bollinger bands.
This strategy or technique is useful to help them reap the benefits of transactions and investments made.
Then, what are Bollinger bands mean, and how to use them in trading?
To find out, see the review below!
What Are Bollinger Bands?
Bollinger bands are a technical analysis tool used to predict the trend of a market.
This technical analysis indicator is used to measure volatility. The indicator will form a channel around the price movement of an asset.
The channel is based on standard deviation and moving average. So, not only is it useful for knowing volatility, but this trading indicator will also help determine trend direction and monitor potential reversals.
This technique will be very important when you want to do scalping to get profits quickly.
The reason for implementing this strategy is so that you can see price movements in a short period to make a profit.
In addition, this strategy is also suitable for the long term because it can predict future asset price trends.
Through this one-trading strategy, traders can see price movement lines that map out two standard deviations at positive and negative points.
In addition, this indicator can distance two standard deviations from the Simple Moving Average (SMA), the stability of an asset’s valuation for 20 days.
However, in the end, this strategy can be adapted to the needs of its users.
History of Bollinger Bands
Referring to its history, John Bollinger is the person behind creating the Bollinger band indicator.
This strategy was patented by the investment market technician in 1977.
The history of its creation stems from John Bollinger’s experience when investing and trading.
He then poured his experience into a microcomputer and conducted a technical analysis.
That analysis makes this strategy capable of recording trend developments related to investment and trading in any industrial sector.
Then, John Bollinger also developed this strategy using a moving average with two trading lines above and below the moving average line.
Apart from the usual moving average percentage calculation, the Bollinger indicator will provide additions and subtractions to the standard deviation calculation.
The standard deviation is a mathematical formula that calculates the volatility of an asset by showing how the valuation of the asset can vary from its initial value.
Furthermore, by calculating price volatility, Bollinger bands adjust market conditions at a certain time.
That makes it very useful for investors and traders as they can find almost all the price data they need between the two lines.
Bollinger Bands indicator
John Bollinger designed this indicator to find buy and sell signals.
The trick is to identify an asset that will be oversold or overbought.
The Bollinger indicator focuses specifically on asset prices and volatility, so its use aligns with other indicators to obtain more accurate information.
The Role of Bollinger Bands in Crypto Trading
Bollinger bands play an important role in crypto trading because this indicator determines market conditions for an asset. In this case, two analysis results are usually available: overbought and oversold.
Overbought is when an asset has reached its saturation point in purchasing.
Generally, it is preceded by a significant upward price trend and then stops at a point.
At that point, traders then release these assets to sell and take profits.
Conversely, oversold is when an asset is at the sales saturation point due to a drastic downward price trend.
After traders sell their assets to make profits, their value will decrease and reach saturation.
Types of Bollinger Bands
Several trading strategies can be done more easily using the Bollinger Band indicator.
Following are the types of trading strategies that can be done with Bollinger Bands, namely:
1. Day Trading Bollinger Bands
With this indicator, traders can predict market conditions and know better strategies when doing day trading.
Some signs that can be found when using Bollinger bands are as follows.
- When the price is in an uptrend, the price will usually touch/along the upper line during the higher impulse wave.
- As long as the trend is up, there is even the potential for the price to fall for a certain period or what is termed a “pullback.” During an uptrend, if the price moves strongly, a pullback low will usually occur near/above the moving average line (middle).
- When the price is in a strong uptrend, the price should not touch the bottom line. If this happens, then it is a warning sign of a reversal.
- When the price is in a downtrend, the price will usually touch/run along the bottom line along an impulse wave going lower. When the price fails to touch the bottom line, it shows that the downtrend may lose momentum.
- During a downtrend, the price still has the potential to rise at a certain time. During a downtrend, if the price moves very low, a high pullback will usually occur near/below the moving average line. The pullback doesn’t have to stop near the middle line of the moving average. However, if this is the case, then it indicates selling power.
- The price should not touch the upper band when it is in a strong downtrend. If that happens, then the sign will be a reversal.
2. Swing Trading Bollinger Bands
Bollinger bands are also one of the market strategies and indicators traders use when swinging traders. Here’s how it works:
- Wait for the price to reach the bottom line of the Bollinger band. Traders ideally want to see price movements and bullish reversal patterns, including morning stars, bullish engulfing, piercing lines, and inside days.
- At the same time, make sure the intraday intensity shows an indication of bullish divergence.
- Open a buy order after the reversal pattern settings are fully formed. Then, place an order for the next candle that follows the pattern.
- Set stop loss below the low of the candlestick pattern and take profit at the middle/top line of the Bollinger band. If the initial resistance is at the top, it will likely be an excellent place to place profit targets. Besides that, remember to use a trailing stop after the price crosses the middle line (moving average).
- Wait until the price reaches the Bollinger Band’s upper line, then form a bearish reversal pattern. Possible patterns are bearish engulfing, evening star, dark cloud cover, and an inside day.
- At the same time, make sure the intraday intensity indicator shows a bearish divergence.
- Then, open a sell order when the reversal pattern setting is complete. Then, place an order on the next open candle that follows the reversal pattern.
- Place a stop loss above the candlestick pattern and take profit when the price is on the middle line (moving average) or the bottom line. If the previous support line is below the bottom line, placing a profit target is a very good point. Remember to follow the stop loss after the price moves past the middle line.
How to Read Bollinger Bands
Please note bollinger bands consist of a Simple Moving Average (SMA).
Here, two bands (bands) are above and below the SMA line.
The upper sideband is called the Upper Bollinger Band, while the lower side is the Lower Bollinger Band.
Regarding how to read this indicator, if it reaches the Upper Band and the closing price (Close) is still below the Upper Band, the condition is called “overbought.”
However, if the price condition has reached the Lower Band but still closes above it, it is called “oversold.”
How to Use Bollinger Bands in Trading
How do you use the Bollinger Band indicator in trading?
It should be noted the Bollinger Band consists of three lines, namely the lower, middle, and upper.
The center line is the moving average for calculating the bottom and top lines.
Typically, the centerline used is the simple moving average. Meanwhile, the top and bottom lines use the exponential moving average as a benchmark.
The two lines are the standard deviation of the asset price being analyzed using this strategy.
The upper and lower lines will widen and tighten with price movements.
Widening upper and lower lines result from asset price volatility while narrowing results in narrow trading patterns.
In this case, an asset can be traded long-term in a trend even if volatility affects its valuation.
To see these trends more clearly, traders will use a moving average to filter price movements.
Thus, traders can also obtain important information regarding the trading situation in the asset market.
Bollinger bands are a type of trading strategy popular among traders and investors.
This indicator is a technical analysis tool used to predict tren a market.
The indicator will form a channel around the price movement of an asset based on the standard deviation and moving average.
Now, you understand Bollinger Bands, right?
Well, now is the time to start crypto trading on INDODAX. Let’s trade right now!