Bollinger bands in trading is a popular technical analysis tool used to measure the price volatility of an asset. This type was developed by John Bollinger and is considered a useful tool. So what is the Bollinger Bands indicator? What is its meaning, advantages, disadvantages, and how to use it? Please refer to the article below by Crypto Trading to find out detailed information!
General understanding of Bollinger bands in trading
The developer of the Bollinger Bands indicator is John Bollinger, the world’s leading financial analyst. Below, are some detailed information about the Bollinger Bands.
What is Bollinger Bands indicator?
Bollinger Bands indicator or Bollinger bands in trading is a popular technical analysis tool used to measure the price volatility of an asset.
Bollinger bands will automatically adjust to expand during volatile market periods and narrow during low-volatility market periods. This type of indicator has been developed since 1983. Until now, Bollinger bands in trading are still trusted and used by many investors.
Meaning of Bollinger bands in trading
Bollinger bands in trading is a very important indicator that helps investors make decisions about placing orders. This type of band usually has two meanings: narrowing and breakout points.
- Narrowing: This is a phenomenon that occurs when both the upper and lower bands move closer together. They will gradually approach the middle band, which is the SMA20 line. This narrowing process reflects a period of low volatility with minimal levels. This appearance is a perfect signal for a return to high volatility in the near future.
- Breakout point: This point is not considered a trading signal but most investors are mistaken. Because this point does not have any clear signs about which direction the price trend will fluctuate. This indicator helps investors have clues about the price of assets that can move in a certain area. Therefore, the potential of Bollinger bands in trading is very well promoted in the process of evaluating the trend.
Bollinger Band Structure
The Bollinger Bands indicator is composed of:
- Moving Average (MA): The MA represents the average price trend of an asset over a given period of time (usually 20 days). When the price moves above the MA line, the trend is considered to be up. When the price moves below the MA line, the trend is considered to be down.
- Upper Band: The upper band shows the high the price can reach before becoming overbought. When the price touches or breaks the upper band it is a sign that the price is overbought and about to reverse down.
- Lower Band: The lower band indicates how low the price can go before it is considered oversold. When the price touches or breaks the lower band it is a sign that the price is oversold and about to reverse up.
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Advantages and disadvantages of using bollinger bands in trading
Below are some advantages and disadvantages of the Bollinger Bands indicator, you can refer to.
Outstanding advantages of Bollinger Bands indicator
Bollinger bands in trading provide investors with a visual way to measure the price volatility of an asset.
This indicator can help investors identify potential buying and selling points. It is based on overbought and oversold price levels.
Bollinger Bands can help traders determine the direction of price. When prices move within the Bollinger bands, the trend is considered neutral. When prices move outside the Bollinger bands, the trend is considered strong.
This is a relatively easy-to-use tool and can be applied to a wide variety of assets.
Limitations of Bollinger Bands
Bollinger bands in trading are based on overbought and oversold levels calculated from the average price and standard deviation. However, the market may not follow these levels and may continue to rise or fall. This, in turn, creates quite a lot of risk in the investment process.
Bollinger Bands are a lagging indicator meaning they are based on past price data. Therefore, they may not reflect sudden changes in the market in a timely manner.
In some cases, Bollinger Bands can generate many false signals. This, in turn, can lead investors to make wrong trading decisions. At the same time, it can happen when the market tends to be highly volatile or when there are unexpected events affecting it.
This indicator works well in certain markets. But it may not work well in others. Therefore, it is important for investors to test it in different markets. Then evaluate its effectiveness before using it in real trading.
This is just a technical analysis tool and should not be used as a trading strategy. Investors should combine it with the CCI index, parabolic sar indicator, RSI, and MACD to make wise investment decisions.
Strategy, how to use Bollinger Bands most accurately
To easily use Bollinger bands in trading, you can follow the following strategies:
Elastic Bollinger bands strategy in trading
The Bollinger Bands contracting indicator strategy is a trading strategy based on the principle that when the Bollinger Bands narrow, this can signal an upcoming increase in price volatility and create potential buying and selling opportunities.
How it works:
- Determine when the Bollinger Bands are contracting: Look at the width of the Bollinger Bands. When the indicator narrows, it means price volatility is low.
- Waiting for the breakout: When the indicator contracts to a certain level, it can be predicted that the price movement will increase soon.
- Determining entry points: There are two common ways to determine entry points. Buying when the price breaks the upper band can be considered a potential buy signal. Selling when the price breaks the lower band can be considered a potential sell signal.
- Set stop loss: Stop loss should be set at a price outside the Bollinger band to limit risk when the market moves against the predicted direction.
- Trade Management: Monitor trades and adjust stop loss if necessary.
How to use Bollinger Bands most accurately in combination with MACD
Combining Bollinger Bands and MACD is a popular trading strategy that can help you identify potential entry and exit points. At the same time, it assesses trends and measures market momentum. In volatile markets, Bollinger bands in trading can be used as a trading stimulus. Combined with MACD can confirm the trading signal to be executed. If there is a Price Action signal, it proves that trading in the market is volatile. Investors should adjust their strategies and wait for the market trend to stabilize.
Bollinger bands trading strategy combined with double bottom top pattern
Combining Bollinger Bands and the double bottom-top pattern is a potential trading strategy. In order to assess the trend and filter out market noise.
How to use:
Identify the double bottom top pattern:
- Two lower lows than the previous low.
- Two higher peaks.
- Form a “W” or “M” shape.
Consider the price position relative to the Bollinger Bands:
- Bottom: Confirmed when price touches or breaks the lower Bollinger Bands at the second bottom.
- Top: Confirmed when price touches or breaks the upper Bollinger Bands at the second top.
Search for entry and exit points:
- Buy: When the price confirms a bottom and crosses above the lower Bollinger Bands.
- Sell: When price confirms a top and crosses below the upper Bollinger Bands.
Combined use with other indicators:
- Trend Indicator: Confirms long-term trends.
- Volume Indicator: Measures investor participation.
Bollinger Bands indicator strategy in the sideway market period
This strategy uses Bollinger Bands in the sideways market phase. When the price touches the upper or lower band of the sideways price phase. Investors can implement this strategy based on the following characteristics:
- Narrowing Bollinger Bands: When the market moves sideways, price volatility decreases, causing the Bollinger Bands to narrow. This, in turn, shows that prices move within a narrower range.
- Flat moving average (MA): The MA line is located at the center of the Bollinger bands in trading and tends to be flatter during sideways market periods.
- Fewer Trading Signals: Due to low price volatility, Bollinger Bands generate fewer trading signals during sideways market periods.
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Conclude
Through the above article, Crypto Trading has provided basic information about Bollinger bands in trading. However, this indicator is just a man-made indicator tool. At the same time, when choosing to use it, investors should research carefully to be able to apply it for a long time. Hopefully, this article can help you in the investment trading process. In particular, don’t forget to follow us to get more useful information about investment!
FAQs:
How to use Bollinger Bands effectively?
Bollinger Bands should be used in conjunction with other indicators and fundamental analysis.
What are the limitations of Bollinger Bands?
Bollinger Bands are not a prediction of future prices. This indicator does not take into account news or fundamental factors that may influence prices.
How do Bollinger Bands help traders?
Bollinger Bands can help traders: Identify volatility phases, identify support and resistance zones, and assess trends…
