Bollinger Bands is developed by technical analyst John Bollinger in the 1980s and actually is very famous among traders. Bollinger band can simply be define as it’s been use to take standard deviation as to measure trading instrument in average which moves over a given period. Basically what you need to know is that they’re used to measure when instruments are oversold or over bought.
Upper band is for overbought
Lower band is for oversold
Bollinger band also has a Middle band but it’s not important as it only shows simple moving average. Traders use Bollinger Bands to know when something is overbought as it indicates that it’s the right time to buy and will bring profit and vice versa. Bollinger Band helps the traders to ding the market trend as it is just like a technical analysis.
Basic Advantage Of Bollinger Bands
As we know that market is so volatile and rate keeps on fluctuating so it’s like taking an average calculation. Bollinger Bands are placed over a price chart by using the concept of standard deviations to add bands above and below the moving average line which helps to define the upper and lower boundaries. You can think of Bollinger Band as a base which helps to know the market price and the overall volatility.
Trading market is so volatile- meaning that exchange rate keep varying over time and Forex traders needs to keep an eye on these changing’s as these things will decide the profit or loss ratio. Bollinger Bands volatility changes can be seen and measure through the width of the bands as the wider the bands, the greater the volatility will be.
How To Use Bollinger Bands?
The usual configuration which is normally used is based on 20 day average so the settings of the bands are 20,2,2 but these can be changed according to the trader’s choice.
Bollinger’s two bands are used to actually know the average price situations and different conditions of the market. When the price is close to the upper band then trader can sell and when the price is closer to lower band then they should buy. The middle moving average line can be used to take the profits or traders can wait for some time and see where the market moves.
Breakouts can also occur and it’s actually a part of Bollinger Band. So when the price closes outside of the two bands then it’s called that breakout has occurred. With the occurrence of breakout traders can see the significant changes in the market and it’s been considered that market will be going in this direction for a while.
The Bollinger Bands Strategy
If price has been moving below the middle line then market is down trending
If price is moving above the middle line then market is up trending.
If price has been at the middle line then trade can be initiated.
If the price is approaching the upper band and upper and lower band is still then reversal is likely to occur which will be for the short time, But if the price is approaching the upper band and lower band movies only a little bit then there is chances of continuation and prices will go up but slowly and only for a little time.
If price approaches the upper band and the upper band goes up and the lower band goes down then prices will continuously go up with fast pace but if rice approaches the upper band and the upper and lower bands both go down then reversal will occur and it depicts the bigger market swings.