Bollinger Bands are a popular technical indicator used in cryptocurrency trading. They are used to measure volatility in the market, helping traders identify potential buying and selling opportunities. Bollinger Bands are created by drawing two lines two standard deviations away from a simple moving average of the price of a given asset. By combining the use of these lines with other indicators, traders can get a better sense of when to enter and exit the markets.
in-depthTrading and investment
in-depthTrading and investment
- Bollinger Bands (BB) is a volatility indicator in the form of a three-line band based on a simple moving average (SMA). The middle line is based on the SMA, the top and bottom lines reflect the deviation from the average SMA.
- BB is used to determine relative highs and lows on stock and cryptocurrency price charts, indices, commodities, options and futures. The tool is also used in relation to trading volumes, market momentum and statistical data.
- The indicator assumes that the price near the upper line indicates overbought, while the price near the lower line indicates oversold. Bollinger Bands do not give signals to buy or sell, but prompt and help determine the direction and possible momentum of the future movement.
Who and when developed the indicator
To date, BB is one of the most popular indicators for technical analysis. The author of Bollinger Bands is the president and founder of Bollinger Capital Management, American analyst John Bollinger.
BB concept developed in 1980 based on the work of both Wilfrid Leda and the trading strips of Chester Keltner. The most famous indicator was the book “Bollinger on Bollinger Bands”, published in 2001.
Bolinger also developed two additional indicators: “%b” and “BandWidth”. %b shows the value of exactly where the BB is from the SMA and is used to build patterns and identify trends. BandWidth shows the distance between the upper and lower Bollinger bands.
How Bollinger Bands Work
Bollinger Bands build a “channel” on the chart that accompanies the asset price curve, and consists of three lines: middle, upper and lower. The basis for plotting the BB is the middle band, which is a simple moving average (SMA). The other two lines are referred to as positive and negative standard deviations.
The default settings for the BB indicator, recommended by its author, are a period of 20 and a deviation of 2. For example, when looking at the Bitcoin daily chart, the settings would look like a 20-SMA with a deviation of 2.
It should be noted that the higher the period, the lower the sensitivity of the indicator. In practice, when fine-tuning the BB, as Bollinger himself noted, 90% of the time the asset price curve should be between the lower and upper lines of the indicator.
How to use Bollinger Bands in trading
Bollinger has compiled a list of short rules that serve as the basis for understanding the BB. For a complete list of rules, see Online Bollinger Capital Management. Here are some of them:
- Touching the price of the bands in itself is not a signal to buy or sell an asset, and the indicator itself only complements other trading instruments.
- Closing the price above the boundaries of the bands often means that the price continues to move in the direction of breaking through the level.
Bollinger Bands can be used for a variety of assets, including cryptocurrencies. This indicator is suitable for use on any period, including five-minute, hourly, daily, weekly and monthly. The period chosen must have sufficient volatility to make the use of the BB worthwhile.
Benefits and Risks of Using Bollinger Bands
Bollinger Bands allows you to determine the average volatility for a particular asset. Using the BB will help determine the potential high or low price of an asset based on standard historical data. The author also indicatedthat the indicator is suitable for identifying price patterns including “double top” or “double bottom”. Along with this, there are risks. Here are some of them:
- Low volatility. Bollinger Bands require sufficient volatility to form a channel. Lack of activity deprives the use of BB.
- Trading risks. The use of Bollinger Bands without additional tools and indicators in the process of making trading decisions is fraught with risks. The BB indicator by itself does not give signals to buy or sell an asset.
- Channel break. The breakout of the Bollinger Bands by the price most often means that the trend will continue in the direction of the breakout. Fixing the price above the channel boundaries does not give signals to buy or sell.
- Use of “same” indicators. Bollinger Bands should not be used in conjunction with moving average indicators. For example, the EMA should not be used in conjunction with Bollinger Bands. According to the Bollinger rules, the indicators should not be linked directly.
- Too long periods. Using the BB on too long periods. Setting the indicator above the period value of 20 makes the indicator less sensitive to changes. This creates unwanted “stability” for the analytics.
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In conclusion, the Bollinger Bands indicator is a valuable tool for cryptocurrency traders. It helps to identify potential entry and exit points, as well as providing an indication of market volatility. By combining the Bollinger Bands with other technical indicators, traders can gain valuable insights into the market and make better informed decisions.
Frequently Asked Questions (FAQs) about Bollinger Bands Indicator in Cryptocurrency Trading
What are Bollinger Bands?
Bollinger Bands are technical analysis tools used to measure volatility of the market. They are created by plotting two bands around a moving average, the upper and lower bands being two standard deviations away from the moving average. The bands will expand when the market is volatile and contract when the market is stable.
How do Bollinger Bands work?
Bollinger Bands are calculated using the 20-day moving average of the closing price and two standard deviations from the moving average. When the market is volatile, the bands will expand and contract when the market is stable. When the price breaks above or below the bands, it may signal a potential trend reversal.
What are the benefits of using Bollinger Bands in cryptocurrency trading?
Bollinger Bands can be used to identify potential trend reversals, identify overbought and oversold conditions, and measure the strength of a trend. They can also help traders identify potential support and resistance levels.
What are the drawbacks of using Bollinger Bands in cryptocurrency trading?
Bollinger Bands do not always accurately predict the direction of the price. They should be used in conjunction with other technical indicators to help confirm the direction of the trend. Additionally, false signals may occur if the bands are contracted too tightly.