What is Bollinger Band Band? For investors following the technical analysis school, Bollinger Band is not a strange term. This is a popular technical indicator, used by many investors to analyze Trading and build effective investment strategies. So what is Bollinger Band and how to use this indicator in investment strategies? Let’s learn more about Crypto Trading through the following article!
What are Bollinger Band Bands?
Bollinger band line is a technical tool that combines a moving average and a standard deviation. This indicator consists of a moving average in the middle and two upper and lower bands.
The distance between the MA and the Bollinger Band depends on the price volatility. The Bollinger Band will widen; Conversely, when the price is less volatile, the bands will narrow.
Common parameters of the Bollinger Bands indicator
Bollinger Bands is a technical indicator that combines a moving average (MA) and a standard deviation. This indicator is known to consist of three main components:
- Upper Band: Calculated by taking the middle band and adding 2 standard deviations.
- Middle Band: Is the 20-day simple moving average (SMA).
- Lower Band: Calculated by subtracting 2 standard deviations from the middle band.
Standard deviation is a statistical measure of how spread out data is. It reflects the difference between values at each point in time and the average value.
Meaning of Bollinger Bands
In Trading investment, Bollinger Band is an important indicator that helps investors make decisions and determine effective price trends. The two main meanings of Bollinger Band that investors need to understand are narrowing and breakout points.
Bollinger Band narrowing
Narrowing occurs when the upper and lower bands of the Bollinger Bands move closer together and are close to the middle band, the 20 SMA. This reflects a period of low volatility for the asset. Narrowing is often a signal for future increases in volatility. It creates an opportunity for investors to enter and make profits. When the bands expand again, volatility will decrease sharply.
Breakout point
The breakout point is not a trading signal as many investors think, because it does not indicate a clear price trend. Instead, it shows that the asset price may move within a certain range and is difficult to break out of that range. Therefore, Bollinger Bands are useful in assessing short-term, medium-term, and long-term trends with high accuracy in all time frames.
See more: Capture indicator to strongly “buff” your transaction
What are the advantages and disadvantages of Bollinger Bands?
So what are the benefits and risks of Bollinger Band Bands? Here are some of the pros and cons of this indicator:
Benefits of Bollinger Bands
Bollinger Band brings many benefits to investors in analyzing and making trading decisions, including:
- Determining Volatility: Bollinger Band helps investors identify the volatility of an asset’s price. When the bands narrow, it is a sign of low volatility. When the bands widen, volatility is increasing.
- Identify potential buy and sell points: Investors can use Bollinger Band to identify entry and exit points. When the price touches the lower band, it could be a buy signal. When the price touches the upper band, it could be a sell signal.
- Detecting price trends: Bollinger Band helps determine price trends. If the price repeatedly touches or crosses the upper band, the trend is likely to be bullish. Conversely, if the price repeatedly touches or crosses the lower band, the trend is likely to be bearish.
- Recognizing a trend change: The narrowing of the Bollinger Band often signals a change in volatility. It can be a sign that a new trend is about to begin.
Possible limitations of Bollinger Band bands
Bollinger Bands (BB) are not intended to be a standalone trading system. They are considered an indicator that provides information about price movements. John Bollinger recommends using them in conjunction with two or three other non-correlated indicators to get more market signals. He emphasizes the importance of using indicators based on different types of data. Such as the MACD and RSI indicators.
Since BB is calculated from an SMA, old and new data are given equal weight. This can dilute the new information. Using a 20-day SMA and multiple standard deviations is optional and not always effective. Traders should adjust these parameters to suit their specific situation.
How to use Bollinger Band effectively
In investing, building a trading strategy is very important. Below are some strategies to help investors use Bollinger Bands effectively in analysis.
Bollinger Bands buy low and sell high strategy
Using Bollinger Bands, investors can build a “Buy Low Sell High” strategy. This strategy is based on the role of the upper and lower bands. For example, resistance and support levels: sell when the price touches the upper band and buy when the price touches the lower band.
This strategy is effective in sideways markets but risky when the market is rising or falling sharply. New investors should use this strategy to understand Bollinger Bands. However, it requires the skill of filtering out noise signals to apply effectively in trading.
See more: MEXC: Open a MEXC account, invest effectively
Bollinger Bands Squeeze Strategy
Bollinger Bands enclose almost the entire price line. This makes the “Bollinger Band Squeeze” trading method a classic. When the market fluctuates in a small range for a long time. It is a sign of upcoming strong volatility. The appearance of the bottleneck zone indicates that the market is about to explode and is a reasonable time to trade. When seeing this sign, investors should wait for a breakout from the narrow accumulation zone before trading.
A strategy combining Bollinger Band with RSI indicator
Not many investors know about this method because they are afraid to search and combine suitable indicators such as OBV indicator :
- The Relative Strength Index (RSI) helps gauge the strength or weakness of a price trend. When the RSI is above 70 and falling, it is time to sell. When the RSI is below 30 and rising, it is time to buy.
- In the RSI and Bollinger Bands combination strategy, traders look for RSI divergence: bearish divergence when the market makes a higher high but the RSI is falling. And bullish divergence when the market makes a lower low but the RSI is rising. This is a signal for an impending trend reversal.
Strategy combining Bollinger Band Bands with reversal patterns
Investors can combine Bollinger Bands with reversal patterns to improve trading efficiency. This method is based on the principle that prices always tend to return to the 20 SMA (middle band) after moving away from it. How to do it:
- Consider support and resistance zones in Trading.
- Observe the shape of Bollinger Bands in these zones.
- Look for reversal patterns such as Bullish Engulfing, Hammer, Bearish Engulfing,…
Thanks to that, investors can determine the appropriate entry point.
Conclude
So, above is the knowledge about Bollinger Band Bands summarized in the article. Hopefully, investors have learned a lot of useful information, and clearly understand the meaning and concept of Bollinger Bands. At the same time, to be successful, investors need to practice and apply knowledge to reality, thereby drawing valuable lessons. Don’t forget to follow Crypto Trading to update more useful knowledge!
FAQs
What indicators are similar to Bollinger Bands?
There are a variety of tools available, including Keltner channels, moving average envelopes, Donchian channels, average true range, and standard deviation indicators. Each of these tools provides a unique view of market volatility.
What are some other limitations when using Bollinger Bands?
Bollinger is a lagging indicator, responding after price changes have occurred. In highly volatile markets, they can produce false signals. The standard settings of Bollinger Band are not always suitable. Using them in conjunction with other indicators is often more effective.
How to avoid false signals from Bollinger Bands?
Use RSI or MACD to assess overbought or oversold market conditions when the price reaches or crosses the band.
