Bollinger Bands are a cornerstone of technical analysis, developed by John Bollinger in the 1980s. This tool consists of a 20-day simple moving average (SMA) flanked by upper and lower bands set two standard deviations away. These bands dynamically adjust to market volatility, helping traders identify overbought/oversold conditions and potential reversals.
Key Features of Bollinger Bands
- Middle Line: 20-day SMA (baseline for trend direction).
- Upper/Lower Bands: Represent ±2 standard deviations from the SMA, forming a price "envelope."
- Volatility Indicator: Bands widen during high volatility and contract during stability.
👉 Master Bollinger Bands trading strategies
How Bollinger Bands Work
- Overbought Signal: Price touches upper band → Potential sell opportunity.
- Oversold Signal: Price touches lower band → Potential buy opportunity.
- Squeeze: Narrow bands foreshadow breakout opportunities.
Example: A cryptocurrency’s price bouncing off the lower band may indicate an upward reversal, especially if confirmed by rising volume.
Trading Strategies with Bollinger Bands
1. Bollinger Bounce
- Works best in ranging markets.
- Buy near lower band; sell near upper band.
2. Trend Confirmation
- Uptrend: Price consistently rides upper band.
- Downtrend: Price hugs lower band.
3. Breakout Trading
- Post-"squeeze," watch for price to break above/below bands with high volume.
FAQs
Q: Are Bollinger Bands reliable alone?
A: No—pair with RSI or MACD for higher accuracy.
Q: How to adjust band settings?
A: Use a 50-day SMA for longer trends or 1.5 deviations for tighter ranges.
Q: What does band widening mean?
A: Increasing volatility, often before major price moves.
Limitations
- False Signals: Common during strong trends (prices may stay outside bands).
- Non-Normal Distributions: Crypto markets often exhibit "fat tails," reducing statistical reliability.
👉 Advanced volatility trading tips
Bottom Line
Bollinger Bands excel in volatility measurement and entry/exit timing but should complement a broader strategy. Customize settings per asset and always confirm signals with additional indicators.
Pro Tip: Combine with volume analysis to filter out noise in choppy markets.
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