The Basics of Bollinger Bands

Bollinger Bands (or simply Boll), were created by American financial analyst John Bollinger. It is a very practical technical analysis indicator designed by combining the concepts of moving averages and standard deviation.

Bollinger Bands are based on a band that is made up of three orbital lines: the upper band, the middle line, and the lower band. The upper band and lower band can be seen as a resistance and support line for the price, while the middle line is a price average.

The Bollinger Bands indicator

In the traditional stock market, the Bollinger Bands formula is most often set to N=20 and K=2. N=20 is the “monthly average MA20”, while in the cryptocurrency market there is no concept of market closure, in this particular case, many investors set N to 30. K=2 means plus or minus 2 times the standard deviation.

The middle line can be interpreted as the SMA, MA = the sum of the closing prices within N days ÷ N.

The upper band is the MA plus twice the standard deviation.

The lower band is the middle line minus twice the standard deviation.

Normally, if an investor wants to shorten the analysis period of the middle lines, such as adjusting the 20-day simple moving average (SMA) to a 10-day SMA, he needs to adjust 2 standard deviations to 1.5 standard deviations simultaneously; if he wants to enlarge the analysis period of the middle line, he needs to increase the value. If you want to enlarge the analysis period of the middle line, you need to increase the value of the standard deviation.

Functions and Applications of Bollinger Bands

Bollinger bands use a unique design to keep more than 90% of the K-lines within the upper and lower ranges. Thus Bollinger bands serve multiple functions:

1. Bollinger bands can be used to indicate support and resistance levels.

2. Bollinger bands can indicate whether a market is overbought or oversold.

3. The price trend is determined by the direction in which the middle line runs.

How to use Bollinger bands in the oscillator market

When using Bollinger bands, the price usually oscillates within the band, which is characterized by the absence of extreme fluctuations and a state of relative equilibrium.

As exampled above, when the price approaches the upper band, it is a selling signal; when the price approaches the lower band, it is a buying signal; when the K-line exceeds the upper band, it is overbought; and when the price exceeds the lower band, it is oversold.

The use of Bollinger bands

When the price is in a continuous upward market, usually the K-line will run between the middle line and upper band. At this time, the middle line can be seen as a support reference. To not break the middle line is seen as a continuation of the trend, and can be in the middle line near the low suction; approaching the upper band as a high buy point. If the middle band cannot be broken quickly, it is considered that the trend will likely change; in the down market, the same applies.

Special movements of Bollinger bands

Contraction movements

As exampled above, when the price falls sharply, the opening of the upper and lower limits of the Bollinger Bands cannot continue to enlarge. The Bollinger upper band in advance from the upper downward shrinkage, waits until the lower limit of the Bollinger support line then from the lower upward shrinkage, indicating the end of a trend, about to start adjusting the state after choosing the direction again.

Expansion movements

As shown in the figure, after a period of downward market, the upper and lower band of the Bollinger band gradually contracted, and the distance between the upper and lower band is getting smaller and smaller, into the adjustment state. When the market price suddenly goes sharply upward, the Bollinger upper band also, lower band accelerated downward movement, so that the shape of the upper and lower rails of the Bollinger band between the formation of a trumpet-like pattern. This price and the upper band at the same time up the opening for the bullish pattern.

When the trumpet opens at a relatively high price level, the upper band ups and the price falls, indicating a bearish pattern.

Notes

When using the Bollinger band technical indicators, investors frequently encounter two of the most common trading traps: the buy-low trap, in which the price not only did not stop falling but continued to fall; and the sell-high trap, in which the investor sold at the so-called high point, but the price continued to rise.

As a result, the price above the upper band or below the lower band only reflects relatively higher or lower prices during this time; there is no absolute. Bollinger band technical indicators in the price channel play a certain reference role, but no absolute, in predicting the future trend of the market.

Conclusion

The Bollinger Bands indicator is a great tool for traders because it includes the trend, buy and sell points, and other important factors. Technical indicators, on the other hand, are based on past data and are derived from a formula, and it is unlikely that prices will rise or fall exactly as calculated by a formula. No technical indicator can predict the future price trend with certainty.

Bollinger bands can only be used as an auxiliary indicator for investment decisions, determining roughly what relative position the current price is in. However, remember that investment still requires a clear trading plan and strict discipline.