Today we are going to discuss how do Bollinger Bands work. The indicator in question is probably familiar to anyone who has done a little technical analysis. The indicator developed years ago by John Bollinger is one of the most frequently used indicators.
How Bollinger Bands indicator is constructed?
Bollinger Bands is an indicator that sets the range of asset price movement. It is built on the basis of three moving averages one in the middle and two others located the same distance from the first one. Range width is calculated by the mathematical formula of standard deviation.
Its coefficient may be set in the indicator settings. The higher the coefficient the wider the range and the more infrequently the chart reaches borders.
Period is a number of candlesticks used in the calculation of indicator parameters. Increasing period smooth the corridor but does not guarantee an increase in indicator performance accuracy.
How do Bollinger Bands work?
When the price approaches or touches one of the lines, the probability of its movement shifts to the opposite direction.
The breakdown of one of the lines signals probable trend movement towards the breakdown. This type of behaviour can be used in a Bollinger Band breakout strategy.
The higher the volatility on the market the higher the corridor.
Long term location of the indicator is in a narrow range. Usually preceding upheaval in the market.
How to use Bollinger Bands
With the principles of the Bollinger Bands indicator mentioned earlier, it is quite easy to imagine what specific signals it can generate for trading. Here we could distinguish 2 basic types of signals:
Bounces from the upper and lower bands. Seeing that the price respects these lines you can sell on the upper and buy on the lower band.
Breakouts from the upper and lower bounds. If the market dynamically crosses the upper band upwards it may be a buy signal. Conversely, if the price dynamically breaks through the lower band it may be used as a sell signal.
Additionally, it is worth observing the width of the band in order to know what is the current situation on a given asset. If the band is wide, we are usually dealing with a strong trend and high volatility. At such moments it is worth using additional tools to join the trend. If the band is narrow, it is usually due to a consolidation of the market. In such a scenario I personally prefer to wait for a directional breakout and only then look for a signal to enter a position.
The Bollinger Bands indicator is best used in combination with other indicators. By the time a strong trend takes place. This indicator alone becomes ineffective.
We wish you successful trading on the IQ Option platform.
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