Nor would you use a buzz saw to drive in nails. Just like in trading, certain technical indicators are best used for particular environments or situations. There are a million different ways to grab some pips! For this lesson, as you learn about these indicators, think of each as a new tool that you can add to that toolbox of yours. You might even find one that you understand and comfortable enough to master on its own. Now, enough about tools already!
When the market is quiet, the bands contract and when the market is LOUD, the bands expand. Look at the chart below. Notice how when the price is quiet, the bands are close together. When the price moves up, the bands spread apart. The upper and lower bands measure volatility or the degree in the variation of prices over time. Because Bollinger Bands measure volatility, the bands adjust automatically to changing market conditions.
Bollinger Bands are typically plotted as three lines: An upper band A lower band The middle line of the indicator is a simple moving average SMA. Most charting programs default to a period, which is fine for most traders, but you can experiment with different moving average lengths after you get a little experience applying Bollinger Bands. The upper and lower bands, by default, represent two standard deviations above and below the middle line moving average.
Have no fear. The concept of standard deviation SD is just a measure of how spread out numbers are. You can try out different standard deviations for the bands once you become more familiar with how they work. Bollinger Band shows the level of activity surrounding the asset in question like the cryptocurrencies bitcoin or ethereum. If the price action hits the upper Bollinger Band, the tool suggests that the asset is overbought and that we may see a rotation from the current levels.
On the other hand, the tag of the lower Bollinger band signals that the market trades in an oversold environment and we may expect a bounce. In a strong uptrend, the price tends to trade between the centerline and the upper Bollinger band, and vice versa.
In this case, crypto traders see a cross below the centerline as a signal that the trend may be reversing. The two main goals of this indicator are to convey the market message on the volatility and to define high resistance or low support on a relative basis. A sharp change in the market behavior is likely to lead towards the squeeze breakout.
Some crypto traders use this as a signal that the consolidation phase is over and the market is breaking out. Trading Bollinger Band in crypto markets As mentioned earlier, there are two generally accepted crypto trading strategies that include the Bollinger Band. One group of crypto traders prefers to use Bollinger Band to define support and resistance lines. If penetrated, these lines are then used to trigger trades.
The aim is to take advantage of rapid price moves caused by high trading volumes and high volatility. The BTC price chart above shows the break of the lower band which offers a trading opportunity. The second group of crypto traders uses the centerlines to define shifts in trends.
FOREX DAILY TREND FORECASTERS
The singular line that you see going through the Bollinger Band is the day Simple Moving Average I changed the color to pink so you can see it better, yours may be a default of red. We spoke about Simple Moving Averages in a previous post. The outer bands that you see are the deviations from the Simple Moving Average.
These bands showcase volatility within a market. For example, the wider that you see the bands in some areas, means the more volatility there was at that time. When you see narrower bands, this means there was less volatility. Example 1: Typically, when you see a period of high volatility wide bands that narrows down into a period of lower volatility narrow bands , this can be a sign that a big breakout is about to happen.
A few examples of this are highlighted below. This is a sign that the price has stabilized enough to where buyers will be entering the market. Now, this breakout may occur in a positive or negative direction so it can be useful using other indicators as well in order to better time the market. Example 2: Bollinger Bands can also be good to see if a cryptocurrency has been overbought, or oversold. When you look at the area within your bands, the majority of the price action will remain within these bands.
Using only the bands to trade is a risky strategy since the indicator focuses on price and volatility, while ignoring a lot of other relevant information Bollinger Bands are an effective technical analysis indicator, however, they do have limitations. Bollinger Bands are based on an instrument's simple moving average, which uses past data points. As a result, the bands will always react to price moves, and not forecast them If the price deflects off the lower band and crosses above the day average the middle line , the upper band comes to represent the upper price target Each test of support is typically accompanied by decreasing volume, until a breakout in price occurs with an increase in volume.
The pattern occurs after an extended downtrend and often represents a reversal pattern that indicates a minor, if not long term, change from a downtrend to an uptrend i.
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