Bollinger Bands are, that is, a technical indicator developed by John Bollinger in the 80\u2019s, and it is a great way of finding trends and volatility in the market which create the opportunities to buy and sell. And since they visualize price movements over a set dynamic range, they are also useful for analyzing the degree of price change in a market. Visually Bollinger Bands are very central in the study of the market.
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The first concept that is required in order to learn about the strategy is the three key components that Bollinger Bands consist of:<\/p>\n\n\n\n
Mid Band:<\/strong> A middle band is a moving average that is the SMA with the calculation periods set to be around 20.<\/p>\n\n\n\n Upper Band:<\/strong> This is plotted above the middle band by two standard deviation values and implies a zone that is capable of withstanding much upward force.<\/p>\n\n\n\n Lower Band:<\/strong> This is the area plotted two standard deviation values beneath the middle band and is likely to be a point where the price can possibly go up from.<\/p>\n\n\n\n The space that separates the bands shows the level of volatility in the respective market, wider bands indicate high volatility while narrow bands indicate low volatility. Volatility Measurement: <\/strong>The band width changes with the nature of the market and in bull markets the distance becomes larger and in bear markets the distance becomes smaller.<\/p>\n\n\n\n Dynamic Nature:<\/strong> These bands are not fixed and are drawn by calculating percentage of the movement of the price, thus, they are suitable for almost all the market conditions.<\/p>\n\n\n\n Mean Reversion:<\/strong> After price touches the top or bottom band, it goes towards the middle band which can be used to develop a number of trading strategies. Overbought Conditions:<\/strong> The upper band of Bollinger Band indicates an overbought condition when the price level reaches and makes a movement above the band.<\/p>\n\n\n\n Oversold Conditions:<\/strong> A price set close to the lower band indicates an oversold condition in which a surge may occur.<\/p>\n\n\n\n Breakouts<\/strong>: Price volatility will almost always increase from a period of lower volatility \u2014 visible as the bands contracting (squeezing). In the financial world, the central theory here is that every price deviates to some extent and at one stage the price will converge back to its means.<\/p>\n\n\n\n Buy:<\/strong> Buy when market hits lower band of the bands, indicating it has gone oversold.<\/p>\n\n\n\n Sell: <\/strong>Sell when price test and breaches the upper band, indicating it has gone overbought.<\/p>\n\n\n\n Tip:<\/strong> This strategy works best in sideways markets rather than trending markets. When the Bollinger bands squeeze together because of a decline in volatility it indicates an impending breakout.<\/p>\n\n\n\n Action<\/strong>: Watch for the breakout in either direction and get on the move.<\/p>\n\n\n\n Confirmation:<\/strong> Combine volume or other indicators in order to check the direction of the breakout. When there is a strong trend, the prices can ride on the upper or lower band but dip into the mean for correction less frequently.<\/p>\n\n\n\n Long-Term Bulls:<\/strong> Price Action Bulls (aka Buying Pressure) Stays Resilient As It Makes New Lows.<\/p>\n\n\n\n Short-Term Bear: <\/strong>Price Action Bears (aka Selling Pressure) Stays Strong as it Focus as Selling Targets As Lower Bands.<\/p>\n\n\n\n Moving averages are good additions to this strategy as filter tools. Reversal patterns were able to be spotted with the help of Bollinger Bands.<\/p>\n\n\n\n Double top: <\/strong>A bearish reversal occurs after prices reach the upper band but shows evidence of weakening on second touch.<\/p>\n\n\n\n Double bottom<\/strong>: A bullish reversal occurs after prices reach the lower band in two dips but shows two lower band touches. Cultural:<\/strong> Different classes of assets & timeframes, trade these stocks, forex, commodities.<\/p>\n\n\n\n Sensitivity:<\/strong> Providing perspectives on the current state of the market.<\/p>\n\n\n\n Possibility:<\/strong> Conducting a good overview of trends in pricing and that in itself reduces the amount of risk present. Band-passes: <\/strong>Backtracking too far off targets based only on end targets, coming in slightly behind the price amount said in most cases.<\/p>\n\n\n\n False Signals<\/strong>: This makes it more so difficult for a majority of traders as the sentiment is constantly mixed.<\/p>\n\n\n\n Subjectivity:<\/strong> Never seems so sure of any point during the trading. Combining with other Point Indicators to create a stronger trend.<\/p>\n\n\n\n Analyze Market Conditions:<\/strong> The first task is to decide whether the market is trending or moving in a range before applying a strategy.<\/p>\n\n\n\n Change Settings:<\/strong> You can change the default values of periods and standard deviations based on the asset and it\u2019s central point.<\/p>\n\n\n\n Practical Example<\/strong><\/p>\n\n\n\n Let\u2019s say India\u2019s Stock Exchange has a stock valued at \u20b91000 and its Smoothed Moving Average valued at 20 days is \u20b91,020.<\/p>\n\n\n\n If the upper band is target selling point at \u20b91,050 and the lower band is selling target at is at \u20b9990:<\/p>\n\n\n\n Exceeding the upper boundary of the range at \u20b91,050 could point to a \u2018too many bought\u2019 situation which might be an opportunity for selling.<\/p>\n\n\n\n Falling below \u20b9990 could represent a \u2018too many sold\u2019 scenario which calls for buy.<\/p>\n\n\n\n It would appear that, a period of band squeeze might after that be embraced by a great price movement, this would be a great time to seek the traders. Due to the statistical character Bollinger Bands are well-known in the automated trading systems. Traders use them for:<\/p>\n\n\n\n Strategies of mean reversion<\/strong>: Making trades when prices differ from the average.<\/p>\n\n\n\n Timing Breakouts:<\/strong> Squeeze scenarios and oomph setting trades related to it.<\/p>\n\n\n\n Managing Risks:<\/strong> Using bands for stop-loss and take profit levels. Bollinger Bands are an effective technical indicator for traders who are looking to gauge market volatility and unearth trading opportunities. They are quite flexible and can be used independently, a word of caution though, They should rather be used in conjunction with a more comprehensive trading strategy. When combined with other indicators and following a rigorous system, Bollinger Bands can boost a trader\u2019s prospects significantly.<\/p>\n\n\n\n
<\/p>\n\n\n\nCore Concepts of Bollinger Bands<\/h5>\n\n\n\n
<\/p>\n\n\n\nHow Does The Bollinger Band Works<\/h5>\n\n\n\n
<\/p>\n\n\n\nPractices When Bollinger Bands Are Used In Trading
<\/h5>\n\n\n\n1. Mean Reversion<\/h5>\n\n\n\n
<\/p>\n\n\n\n2. Bollinger Band Squeeze<\/h5>\n\n\n\n
<\/p>\n\n\n\n3. Riding The Bands<\/h5>\n\n\n\n
<\/p>\n\n\n\n4. Double Tops and Bottoms<\/strong><\/h5>\n\n\n\n
<\/p>\n\n\n\nBenefits of Bollinger Band<\/strong><\/h5>\n\n\n\n
<\/p>\n\n\n\nA Major Risk & Important Notes<\/h5>\n\n\n\n
<\/p>\n\n\n\nBest Practices for Using Bollinger Bands<\/strong><\/h5>\n\n\n\n
<\/p>\n\n\n\nMentioned Concepts in Algorithmic Trading<\/h5>\n\n\n\n
<\/p>\n\n\n\nConclusion<\/h5>\n\n\n\n