What are the Bollinger Bands?
The Bollinger Bands, also known as 'Bollinger Bands' and 'Bollinger Lines' (Bollinger Bands, commonly referred to as BBand), is a technical analysis tool.
The Bollinger Bands are an indicator that uses the standard deviation and moving averages to analyze price volatility and trends. It measures the range of price fluctuations by creating a price channel between two extreme values and the subsequent trend.
Investors can use the Bollinger Bands to determine the market price's overbought and oversold conditions. The Bollinger Bands constrain price fluctuations within a certain range and provide useful trading signals and information about market momentum.
The Bollinger Bands are constructed from three Bollinger tracks to observe price volatility and market trends. They are: Upper Band indicates 'overbought' or overvalued levels. Middle Band is the simple moving average (SMA), used to measure the average price level. Lower Band indicates 'oversold' or undervalued levels. Bandwidth represents the price safety zone.
Calculating the Bollinger Bands Before starting to understand the settings and applications of the Bollinger Bands, one first needs to understand the calculation methods of the middle band, upper band, lower band, and bandwidth.
Calculation of the Middle Band The middle band is the simple moving average over the period. The middle band is the benchmark line of the Bollinger Bands, representing the average price over a certain period (n), typically calculated using the simple moving average (SMA).
Calculating the upper and lower bands
The upper and lower bands are key components of the Bollinger Bands, used to measure price volatility. Their calculations are based on the middle band and the standard deviation.
Calculation of Bandwidth The bandwidth of the Bollinger Bands is one of the important parameters, representing the width of the price channel, which is the distance between the upper and lower bands. The formula for calculating bandwidth is as follows: Bandwidth can help investors identify the amplitude of market price fluctuations, typically providing important market signals when the price channel narrows or expands.
The above are the main calculation steps for the Bollinger Bands. Next, we will understand the settings of the Bollinger Bands.
The parameters of the Bollinger Bands In the calculation method mentioned above, we learned that the core parameters of the Bollinger Bands are based on: the calculation period of the simple moving average and the multiple of the standard deviation. Next, let’s understand how these parameter settings for the Bollinger Bands will affect the trading strategies of investors.
Simple Moving Average The middle band of the Bollinger Bands is calculated using a simple moving average. A simple moving average is a method of calculating the average price over a period of time, used to determine the value of the middle band.
Generally, the calculation period for the simple moving average is set to 20. The 20-day SMA is the average of the closing prices over the past 20 trading days.
Of course, this value is not fixed. Depending on different financial products and the investor's own trading strategy, adjustments to the SMA value can be made: shorter periods - react more quickly to price changes, sensitive to short-term trends; longer periods - smoother, more sensitive to long-term trends.
The multiple of the standard deviation is another important parameter used to determine the upper and lower bands of the Bollinger Bands. The multiple of the standard deviation determines the width of the channel.
Typically, the multiple of the standard deviation is 2, which is the default optimal setting for the Bollinger Bands. Of course, this value is not fixed. Depending on different financial products and the investor's own trading strategy, adjustments to the standard deviation multiple can be made:
A narrower multiple will react more quickly to price changes but may generate more frequent trading signals. A wider multiple will filter out smaller price fluctuations and is suitable for medium to long-term trading. So why choose a 2 standard deviation? This is mainly based on statistical principles and practical applications.
Normal Distribution Chart In a normal distribution, approximately 68.2% of data points fall within ±1 standard deviation of the mean, while about 95.4% of data points fall within ±2 standard deviations, and about 99.7% fall within ±3 standard deviations of the mean.
Using a 2 standard deviation is because statistics tell us that this distance can cover about 95% of the fluctuation range. In simple terms, fluctuations within this range are considered 'normal.' If the price exceeds this range, it may be abnormal and worthy of special attention.
Choosing a 2 standard deviation for the upper and lower bands of the Bollinger Bands aims to capture approximately 95.4% of the price fluctuation range, which represents most reasonable price data, thus reducing the chances of 'false breakouts.'
Bollinger Bands Contraction When the upper and lower bands of the Bollinger Bands gradually come closer together, the distance significantly decreases. This indicates that market volatility is decreasing and suggests potential for significant price fluctuations.
From the chart above, we can see that the red box indicates that the Bollinger Bands are beginning to contract, leading to a significant price movement.
Bollinger Bands Expansion When the upper and lower bands of the Bollinger Bands rapidly separate and expand, this indicates an increase in market volatility, meaning the current price fluctuations are very intense.
From the chart above, we can see that the red box indicates that the Bollinger Bands are starting to expand, followed by a significant price movement.
The upper band touches or breaks the candlestick that touches or exceeds the upper band of the Bollinger Bands. This also indicates that the market is overheated, serving as a warning of overbought conditions, but does not necessarily mean a downturn is imminent.
From the chart above, we can see that the red box marks show that the candlestick has touched the upper band, indicating an overbought condition, but it does not mean that a downturn is guaranteed; one still needs to observe the area in question.
At relatively high price levels, this serves as a warning bell, alerting traders that this price level is overbought, while at low price levels, it can be seen as a potential breakout.
The lower band touches or breaks the candlestick that touches or falls below the lower band of the Bollinger Bands. This also indicates that the market is experiencing a cold state, serving as a warning of oversold conditions, but does not necessarily mean that a rise is imminent.
Through the chart above, we can see that the red box marks show that the candlestick has touched the lower band, indicating an oversold condition, but it does not mean that a rebound is guaranteed; one still needs to observe the area in question. Here, traders need to carefully observe and use additional indicators to judge the trend.
W-Shaped Bottom A W-shaped bottom is a double bottom pattern that forms two distinct lows near the lower band of the Bollinger Bands, with the second low typically higher than the first. This is a bullish pattern that signals a potential upward trend.
In this case, investors can observe when the price crosses the middle band to choose to buy, which will reduce trading risks.
From the chart above, we can see that the black box indicates a clear W shape, followed by a price rebound and rise.
M-Shaped Top An M-shaped top is a double top pattern that forms two distinct highs near the upper band of the Bollinger Bands, with the second high typically lower than the first. This is a bearish pattern that signals a potential downtrend.
In this case, investors should be cautious when buying, as the drawdown in such patterns can be relatively large, consider shorting.
From the chart above, we can see that the cyan mark in the black box shows a clear M shape, followed by a price decline.
Corridor Operation When the candlestick continues to run along the upper or lower bands of the Bollinger Bands, it indicates a very strong trend in that direction, and the trend is continuing. Of course, investors need to be cautious of possible price reversals.
From the chart above, we can see that the black box indicates that the candlestick has been moving along the upper band, symbolizing a strong upward trend.
Bollinger Reversal The candlestick may repeatedly touch the upper or lower bands without a clear trend, moving within the Bollinger Bands, which usually indicates that the market is in a sideways state. Investors may choose to engage in sideways band trading during this period, buying low and selling high until the market shows a clear direction to reassess trading strategies.
From the icon above, we can see that a signal of Bollinger reversal appears in the black box, followed by signs of 'Bollinger Bands contraction,' and finally, the market trends upward.
Bollinger False Breakout The candlestick may suddenly break the upper band of the Bollinger Bands but then quickly reverse and fall back. This 'false breakout' may be an illusion meant to attract investors to buy rather than a true trend change. Therefore, traders need to be cautious and use other indicators to identify 'traps' or 'opportunities.'
From the chart above, we can see that the black box shows a signal of breaking the upper band, but the price quickly reverses and declines within a short period, leading to a downward market trend.
Contraction Breakout When the Bollinger Bands contract (i.e., the width of the Bollinger Bands decreases), it indicates reduced market volatility. This contraction usually signals a market consolidation and is a precursor to a significant price movement.
From the chart above, we can see that the black box indicates that the Bollinger Bands have reversed from expansion to gradual contraction, indicating a consolidation period.
After a certain extent, as shown in the red box, the market begins to break away from consolidation, leading to a breakout and the Bollinger Bands beginning to expand, continuing to rise.
Through the above explanation, I believe you will have a deeper understanding of these 10 patterns of Bollinger Bands and can further apply this theoretical knowledge to practical trading strategies, thereby making more effective decisions.
However, like any other technical analysis tool, the Bollinger Bands also have their pros and cons.
Using Bollinger Bands in conjunction with other indicators can help identify potential buying and selling points, in addition to recognizing market volatility. Below, we will explore in detail how to combine Bollinger Bands to formulate practical trading strategies.
Bollinger Bands Combined with MACD Indicator The MACD indicator, Moving Average Convergence & Divergence, is a trend-following indicator used to analyze the momentum of price movements, consisting of a fast line (DIF), a slow line (DEA), and a histogram.
The MACD cross can also serve as one of the signals for buying and selling. Of course, it should be appropriately combined with the Bollinger Bands to confirm market trends.
Through this case: In the example marked in red, it can be seen that when the stock price rises to a higher level, the candlestick is above the middle band of the Bollinger Bands and touches the upper band, followed by a death cross appearing on the MACD line at a high position, then the trend begins to turn downwards. In the example marked in cyan, the opposite case can be observed; when the stock price falls back, it is below the middle band of the Bollinger Bands and touches the lower band, after which a golden cross appears on the MACD, and the trend gradually shifts upwards. By combining these two indicators, investors can apply this combination as one of the key investment strategies in both short-term and long-term investments.
Using the Bollinger Bands with the MACD indicator can help investors gain a deeper and more comprehensive understanding of price trends in financial products.
Next, the combination of Bollinger Bands and the RSI indicator has its unique value, so we will explore how to effectively utilize the Bollinger Bands and RSI indicators to provide traders with alternative investment strategies and perspectives.
Bollinger Bands Combined with RSI Indicator The RSI indicator (Relative Strength Index) is a momentum oscillator used to analyze the recent magnitude of price changes to assess the relative strength balance between buying and selling over a specific period.
The RSI indicator is commonly used to determine whether an asset is overbought or oversold, and when combined with the Bollinger Bands, it can help confirm market trends.
The value of the RSI ranges from 0 to 100; when it exceeds 70, it indicates overbought conditions, while below 30 indicates oversold conditions.
Through this case: In the example marked in red, it can be seen that when the stock price rises to a higher level, the candlestick is above the middle band of the Bollinger Bands and touches the upper band, followed by the RSI exceeding 70, then the trend begins to turn downwards. In the example marked in cyan, the opposite case can be observed; when the stock price falls back, it is below the middle band of the Bollinger Bands and touches the lower band, after which the RSI drops below 30, and the trend gradually turns upwards. By combining these two indicators, investors can apply this combination as one of the core investment strategies in both short-term and long-term investments.
Bollinger Bands can help identify the range of price fluctuations and possible overbought or oversold conditions, while the RSI provides information about price momentum.
When both are used together, multiple corroborating signals will make investors more confident in predicting future market trends.
The Bollinger Extreme Indicator, also known as '%B' (Percent B), is a derived indicator of the Bollinger Bands. It is designed to quantify the Bollinger Bands and help traders determine the relative position of the price within the Bollinger Bands.
In trading, remember: volume-price synchronization often reflects the health of a trend, while volume-price divergence may indicate a trend reversal.
Learn to recognize these volume-price relationships and flexibly apply them in actual trading to greatly enhance your trading success rate.
Advice for Cryptocurrency Trading:
1. Do not easily throw away bull coins; prioritize bull coins. Gain at the halfway point, and invest in both hot and strong coins, suitable for both investment and speculation.
2. The most important thing for a trader is the ability to adapt during trading.
3. Qualitative analysis must be done well. Qualitative analysis at large cycles, selecting coins on weekly charts, analyzing on monthly charts, tracking on daily charts.
4. Follow the rules; use Bollinger Bands or any moving average you deem feasible to analyze the market.
5. Skills cannot be taught; they rely solely on technical excellence. Repeat successful experiences to make earning money a habit; consistently earning is more important than making a large profit.
Playing around in the cryptocurrency world is essentially a battle between retail investors and whales. If you lack cutting-edge information and first-hand data, you can only be 'cut'!
There is a saying I strongly agree with: The boundary of knowledge determines the boundary of wealth, and a person can only earn wealth within their knowledge boundary.
Maintain a good mindset in cryptocurrency trading. Don’t let your blood pressure rise during a big drop, and don’t get carried away during a big rise; securing profits is key. For those with limited resources, being steady is the unbreakable path to survival. Good luck!
$BTC $ETH
