What are Bollinger Bands indicator?

The Bollinger Bands indicator (BB) was created by financial analyst and trader John Bollinger in the early 1980s. The Bollinger Bands indicator is widely used in the field of technical analysis (TA) as a (financial analysis) tool. Basically, it is an oscillator that indicates high and low fluctuations in the market, as well as overbought or oversold conditions. Condition.

The main principle of the Bollinger Bands indicator is to emphasize how prices fluctuate around the average value. To be more specific, the indicator consists of an upper band, a lower band, and a middle moving average (also called the middle band). Two sideways bands respond to market price action, expanding (moving away from the midline) when volatility is high and contracting (moving toward the midline) when volatility is low.

The standard Bollinger Bands formula sets the middle line as the 20-day simple moving average (SMA), while the upper and lower bands are based on market volatility relative to the SMA (called the SMA). is the standard deviation) calculation. The standard configuration of the Bollinger Bands indicator is as follows:

• Mid rail = 20-day moving average (SMA)

• Upper track = 20-day SMA + (20-day standard deviation x 2)

• Lower track = 20-day SMA - (20-day standard deviation x 2)

The standard Bollinger Bands have a 20-day cycle and set the upper and lower bands to two standard deviations (x2) away from the mid-track line. This is done to ensure that at least 85% of the price data will fluctuate between these two bands, but the setup size can also be adjusted based on different needs and trading strategies.

How to use the Bollinger Bands indicator in trading?

Although Bollinger Bands indicators are widely used in traditional financial markets, they can also be used in cryptocurrency trading systems. There are various ways to use and analyze the Bollinger Bands indicator, but one should not treat Bollinger Bands as a stand-alone tool or as an indicator indicating buy/sell opportunities. Instead, Bollinger Bands should be used in conjunction with other technical analysis indicators.

With this in mind, let’s think about how one might interpret the data provided by the Bollinger Bands indicator.

If the price is above the moving average and above the upper Bollinger Bands, it is probably safe to assume that the market is overextended (overbought) at this time. On the other hand, if the price touches the upper band multiple times, it may indicate a significant level of stress.

Conversely, if the price of certain assets drops significantly and exceeds or touches the lower band multiple times, the market may be oversold or have reached a strong support level.

Thus, traders can use Bollinger Bands (and other TA indicators) to set their sell or buy targets, and similarly, they can also target overbought conditions in the market. and have a general understanding of oversold conditions.

Also, the expansion and contraction of the Bollinger Bands indicator can be useful when trying to predict moments of high and low price swings. The band will move away from the mid-rail line (expand) as asset prices fluctuate violently, or move toward the mid-rail line (contract) as price fluctuations weaken.

Therefore, the Bollinger Bands indicator is more suitable for short-term trading as a tool for analyzing market volatility and trying to predict the upcoming trend. Some traders believe that when a band overextends, the current market may be consolidating or about to reach a trend reversal. Likewise, when the bands are too narrow, traders believe the market will move dramatically.

When market prices move sideways, Bollinger Bands tend to narrow toward the central simple moving average. Typically (but not always), low volatility and small bias levels precede large explosive moves, which can occur once volatility picks up.

Bollinger Bands indicator vs Keltner Channel

VS based on SMA and standard deviation Unlike Timberline, the modern version of the Keltner Channel (KC) indicator utilizes the Average Range Index (ATR) to set the channel width above and below the 20-day exponential moving average (EMA). Therefore, the formula for the Keltner Channel is roughly like this:

• Middle track = 20-day exponential moving average (EMA )

• Upper track = 20-day EMA + (10-day ATR x 2)

• Lower track = 20-day EMA - (10-day ATR x 2)

Normally, Keltner Channels will exhibit tighter bands than Bollinger Bands. Therefore, it is perhaps better suited than Bollinger Bands to indicate trend reversals and overbought/oversold market conditions in a clearer and more obvious way. Additionally, the Keltner Channel indicator often provides overbought/oversold signals earlier than the Bollinger Bands.

Bollinger Bands, on the other hand, are a better representation of market volatility because they expand and contract with greater and more definite movement than Keltner Channels. Furthermore, by using the standard deviation, the Bollinger Bands indicator is less likely to provide false signals because its width is larger and therefore (upper and lower bands) difficult to cross.

Bollinger Bands are more popular than Keltner Channels. However, both indicators are good - especially for short-term trading setups - and the two can also be used in combination to provide more reliable (market) signals.