Bollinger bands are charts indicator developed by John Bollinger and are used to measure the volatility of the market.
The Bollinger bands consist of three bands, that is; the center line band also referred to as simple moving average(SMA), the upper and the lower band which are also referred to as price channels.
The centerline band which is the simple moving average(SMA) is normally set at 20 periods. The simple moving average is used because it uses the formula for standard deviation.
The upper and lower bands which are based on volatility will widen(expand) when the volatility of the market increases and narrow(contract) when the volatility of the market decreases.
According to John Bollinger, the bands should contain 88%-89% price action making the move outside band significant. To get the price action of the upper band, you add price action+(sdev*2) while to get the price action of the lower band, you subtract price action-(sdev*2)
When the upper and lower band expand, it tells the trader a different language. For the expansion of the upper band,it tells the trader that the market has been overbought thus it is time to collect the profit made and enter a sell position while for the lower band, it tells t
he trader that the market has been oversold thus it is time to collect the profit made and enter a buy position. This is illustrated from the figure below;
From the candlestick chart above, there are three bands indicatede by the red arrows.The lower band, the middle band, and the upper band. Due to volatility of the market, the lower band expands thus signaling the trader that the market has become oversold thus they should close any sell position and enter a buy position since the market will start moving upwards.Th upper band could be seen expanding thus signaling the trader that the market has become an overbought market thus they should close any buy position and enter a sell position since the market will start moving downwards
recommendation: if you are a day trader just use 1 min, 5min .15 min and 30 min time frame while if you are a swing trader just use 1 hour and above time frame if you want Bollinger bands indicator to work well for you
If you would like to support our work, here is our tipping details;
skrill donation:[email protected]
Neteller donation:[email protected]