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What are Bollinger Bands?
Want to know how to use the Bollinger Bands indicator? The Bollinger Bands indicator, also known as the BOLL indicator, is one of the most popular technical analysis tools on the trading floor today. The Bollinger Bands, also translated as Bollinger Bands, refer to the bands (price channels) on a chart that indicate the range of fluctuations in the price of a security up or down.
Bollinger Bands is one of the most popular technical analysis tools implemented in today's trading environment. As the name suggests, Bollinger Bands refer to the bands (price channels) on a chart that indicate the range of fluctuations in the price of a particular security up or down.
The Bollinger Bands consist of three lines: the upper, middle and lower rail lines. The mid-trajectory is a 20-period simple moving average (SMA). The upper and lower tracks are drawn on both sides of the SMA line, and the distance between the two is determined by the standard deviation.
The Bollinger Bands are usually bounded by the so-called 20 periods. Some traders choose to take hours as the unit, while others prefer long-term observation and choose days as the unit. However, the time period does not have to be set at 20 cycles, the specific time frame is chosen by the trader.
It should be noted that many traders increase the standard deviation when plotting a chart with more than 20 periods and decrease the deviation vice versa. Traders can also set the standard deviation first and then use the indicator to calculate the required period. However, many people prefer to use two standard deviations compared to the average because it reflects about 95% of the price movement.
So, how does the Bollinger Bands look? The upper and lower tracks represent standard deviations, which means they reflect price fluctuations. When the tracks contract and get close together, it means that the market will usher in a downturn.
Conversely, when the distance between bands widens, market volatility strengthens and price action increases. If the bands start to form a small slope and remain parallel for a long time, then usually the price usually swings between bands, just like in channels. By defining the standard deviation, the band can also determine the price points at which support and resistance levels may occur.
The principle of the Bollinger Bands indicator is that by comparing the position of the stock relative to the swing, the trader can determine whether the stock price is high/low. If the share price is constantly approaching the upper Bollinger line, the price is considered overbought. Conversely, constantly approaching the lower track indicates oversold. In other words, these are signals to buy or sell.
Bollinger Bands are one of the most reliable and effective technical indicators among the optional trading tools. The Bollinger Bands indicator is recognized as really reliable because it has been using volatility to adjust the current economic environment and price behavior in real time. As long as the price does not exceed the Belling channel, traders do not have to worry about the price performance not matching expectations.
Who invented the Bollinger Bands?
Both new traders and veteran investors alike use Bollinger Bands to analyze market trends. The inventor of this technical indicator, John Bollinger, is an American financial analyst and an expert in the field of technical analysis.
In the early 1980 s, John Bollinger began developing the Bollinger Bands. Back then, he was involved in options trading, and most of the analysis revolved around volatility. At the beginning of the development, he used the Keltner Channel (Keltner Channel) as the technical basis, combined with the volatility standard deviation, to make the trading range more adaptable. He plots the 20-day moving average of the closing price, with bands on both sides, representing a doubling of the standard deviation of the moving average. It was found that this effectively captured about 95% of the variation from the moving average.
Bollinger first introduced the concept to the online world of financial news in 1983. Published in 2001, his book "The Bollinger Bands" has now been translated into eleven languages. In addition, he coined the term "rational analysis", which focuses on the overlap between fundamental and technical factors, mainly for market analysis.
What is the role of the Bollinger Bands?
Bollinger Bands offer many advantages to traders. In volatile markets, the advantages of Bollinger Bands are: determining price patterns, reading trend strength, positioning the best time to market, and flexible and dynamic search for potential markets. Bollinger Bands are often used in conjunction with other analytical tools to provide traders with an objective view of the market and serve as a key decision area for various trading strategies.
How to use the Bollinger Bands indicator?
The use of the Bollinger Bands indicator (BOLL indicator) varies depending on the trader's overall trading strategy, style and objectives. However, it is worth mentioning that Bollinger Bands trading is not limited to stocks, options and CFD traders often use Bollinger Bands to analyze market trends.
When using Bollinger Bands, many people define low-band and high-band as target prices. Some traders buy when the price hits a lower band and exit when the price hits the moving average in the center of the band. Others prefer to sell when the price is below the lower track and buy when the price breaks the upper track.
- Overbought and oversold strategies
Overbought and oversold strategies are favored by many. This strategy relies heavily on Bollinger Bands and depends on the mean reversion of prices. Mean reversion means that even if the price deviates significantly from the average price, it will eventually return to the average price.
As Phronimos Group all know, the Bollinger Bands indicate asset prices that deviate from the mean. Thus, when the asset price breaks the lower rail, the trader can go long the market and wait for the price to return to the middle rail; And vice versa, when the price breaks the upper rail, the trader shorts the market, wait for the price to fall back to the mid-track.
- Card squeeze strategy
The squeeze strategy is a relatively simple and easy Bollinger Bands strategy. Squeeze refers to the narrowing of the trading range, meaning a breakout is imminent.
This happens when prices suddenly start to move sideways under a small crunch during a big price increase. Traders can see the change in the price of the asset from the closer and closer upper and lower tracks in the chart, which means that the volatility of the asset has weakened.
After a period of consolidation, prices tend to move in either direction, especially at high volumes. When the price breaks out, the increased trading volume indicates that the trader believes that the price will continue to move in the direction of the breakout. When the price breaks the lower or upper track, the trader will choose to sell or buy the asset. In General, stop orders are used in the opposite direction of price breakouts.