Bollinger Bands are a popular trading technical analysis technique. Developed by John Bollinger in the 1980s, traders use this indicator to spot buy and sell signals. Understanding Bollinger Bands helps improve your trading and investing selections, regardless of your expertise.
Bollinger Bands?
Three lines on a price chart form Bollinger Bands, a volatility indicator. These lines use standard deviation, which quantifies data point dispersion from the average. Bollinger Bands have three lines:
Upper Band: Price volatility peaks here. Usually shown two standard deviations above the moving average.
Lower Band: Price volatility’s lowest point. Usually shown two standard deviations below the moving average.
The Simple Moving Average (SMA) shows the average price over time. The most frequent period is 20, however traders may customize it.
Bollinger Band Interpretation
Bollinger Bands assist traders predict asset volatility and price movement. The market is overbought when the price approaches the top band, signaling a sell opportunity. The market is oversold when the price falls to the lower band, signaling a buying opportunity.
Bollinger Bands expand and shrink with market volatility. Widening bands imply strong volatility, whereas contracting bands suggest low volatility. Market breakouts and reversals are regularly predicted by traders using this data.
Trading using Bollinger Bands
Bollinger Bands are often used to find trading strategy entry and exit points. The following are some ways traders use this indicator:
Trend identification: Bollinger Bands help traders identify asset trends. An uptrend occurs when the price remains above the center band, whereas a downtrend occurs when it stays below.
Market volatility: Wider bands suggest more volatility. This information might help traders adapt their methods, such as employing broader stop-loss levels or taking smaller holdings during turbulent times.
If the price crosses the upper or lower band, the market may return to the moving average. Traders may check candlestick patterns and other technical indicators for reversal signs.
Conclusion
Bollinger Bands help traders make intelligent trading choices. Beginners might obtain market advantage by studying and interpreting this indication. Remember that Bollinger Bands perform well with other technical analysis tools and indicators, so examine numerous considerations before trading.
References and sources:
1. Bollingerbands.com
2. investopedia.com
3. Stockcharts.com