The outer Bollinger Bands ® are dependent on market volatility, which means that they expand when prices fluctuate and patterns are high, and the Bands contract during sideways consolidations and low momentum patterns.
By default, the Bollinger Bands ® are set to 2.0 Standard deviations, which ensures that 95% of all market action takes place between channels from a statistical point of view.
When the price pierces either of the Bolling Bands ® – this highlights that there is a change in price away from the mean.
The middle of the Bollinger Bands ® is the 20-period mean average of the price and the optimal complement to the volatility-based outer bands.
Calculation of the Bollinger Bands ®
First of all, measure a simple moving average.
Then, measure the standard deviation for the same number of cycles as the simple moving average.
Connect the standard deviation to the moving average for the upper section. In the lower band, deduct the standard deviation from the moving average.
Fortunately, you don’t need to input the maths thanks to advances in technology.
You can find the Bollinger Band ® indicator on virtually every trading platform, this will plot them for you.
Typical values used for:
Short-term: 10 day period, 1.5 standard deviation bands.
Medium-term: 20 day period, 2 standard deviation bands.
Long term: 60 day period, 2.5 standard deviation bands.
How to trade trends using Bollinger Bands ®
Bollinger Bands ® is not as laggy as other indicators, so they can adjust with the price directly.
The key difference here is that they are plotting the MEAN movements, not the CLOSE prices.
We may use Bollinger Bands ® to assess the potential of movements and to gain a lot of useful intel in this way.
There are only a few things that you need to pay attention to when it comes to using Bollinger Bands ® to evaluate market strength:
During strengthening/weakening markets, prices remain similar to the outer band.
If the price shifts away from the outer band as the market moves, it shows a declining momentum.
Repeated moves through the outer bands that don’t really hit the band to demonstrate a lack of control.
What are Bollinger Bands ® telling you?
Bollinger Bands ® is a very common technique.
Many traders assume that the more prices travel to the upper band, the more the market oversold, and the more prices move to the lower band, the more the market oversold.
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