John Bollinger, a financial analyst and trader, created Bollinger Bands (BB) in the early 1980s. They are usually used as a technical analysis( TA) tool and they function as an oscillator measure. It shows if the market has low or high volatility and oversold or overbought market conditions.
BB indicator's main idea is to indicate how costs are distributed around an average value. It is made of an upper band, a lower band, and a middle band, which is also called the moving average line.
The two sidelong bands react to the action of the market price contracting when the volatility is low and expanding when it is high. When the bands expand, they move away from the middle line and when they contract, they move towards the middle line.
The standard BB formula has its middle line set as a 20-day simple moving average (SMA). The upper and lower bands are calculated according to the market volatility in relation to the SMA, referred to as standard deviation.
Per the Bollinger Band experts,"The standard settings for the Bollinger Bands indicator would look like this: Middle line: 20-day simple moving average (SMA), Upper band: 20-day SMA + (20-day standard deviation x2), and Lower band: 20-day SMA - (20-day standard deviation x2)."
The setting acknowledges a 20-day period and sets the lower and upper bands to two standard deviations (x2) away from the moving average line. This is to make sure that 85% of the cost data will be shifting between the two bands. Nonetheless, the settings may be changed according to different needs and market plans.
Using Bollinger Bands in Trading
Traditional markets commonly use Bollinger Bands, however, they can also be used for cryptocurrency markets.
There are many ways to use and interpret Bollinger Bands; however, for best results, it is advisable to use it with other technical analysis tools and it needs to be seen as a buying and selling opportunities' indicator.
If the cost is above the moving average and goes past the upper Bollinger Bands, it indicates that it is in an overbought condition ( overextended). If the cost touches the upper Bollinger band many times, it shows a resistance level.
Contrastingly, if the cost goes below or touches the lower band many times, it means that the market is oversold or it has a strong support level. Accordingly, every trader needs to use Bollinger bands with other indicators to come up with their buying or selling targets.
Additionally, Bollinger Bands are best used for short-term trading to assess the volatility of the market and predict upcoming market actions.
According to bollinger bands' experts, "Some traders assume that when the bands are over-expanded, the current market trend may be close to a consolidation period or a trend reversal. Alternatively, when the bands get too tight, traders tend to assume that the market is getting ready to make an explosive movement."
Also, the BB bands usually move towards the middle average line when the market price is moving sideways. In most cases, tight deviation and low volatility levels surpuss huge and explosive motions, which commonly happen after the volatility picks up again.
Notably, traders usually use the Bollinger Bands Squeeze technique with other technical analysis methods like resistance and support lines because it does not provide a clear market direction as it is neutral.
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