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.
Price behavior and Bollinger bands
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.
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.
The Bollinger Bands indicator is best used in combination with other indicators. As by the time a strong trend takes place. This indicator alone becomes ineffective.
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