Another trading guide, another indicator. Bollinger Bands is an indicator made up out of three lines. This one can help you identify the potential overbought and oversold areas of an asset, and it can help you identify the volatility of the market. Let’s get to it!
The Bollinger Bands are made up out of three different lines. The upper band, the lower band and the middle band. In a standard Bollinger Band the middle band is a 20-period moving average, in which the period is defined by the chart you’re watching. The lower band is the middle band minus a standard deviation of 2, while the upper band has a standard deviation of plus 2.
Let’s take a look at a chart filled with the Bollinger Bands…
Here you see a chart of ZRX or 0x against BTC. The three Bollinger Bands are green in this chart. At point one you can see the asset was slightly over bought, after that it dropped for a while. At 2, 3 and 4 it was oversold, even though the asset never really rose in value during that period as it never crossed the 20 day MA line, or the middle band.
Around the 20th of September ZRX/BTC became bullish. It crossed the 20 MA middle band and hit the upper band. Sentiment remained positive surrounding ZRX as it never hit below the middle band. This is clearly a bullish signal and the asset kept pushing against the upper band at point 5, 6 and 7. These outer bands, be it the lower of the upper, are basically a form of resistance and support.
Obviously you can’t only decide your buy-ins based on one indicator. When using the Bollinger Bands, only buy when and asset hits the lower band. While doing this, look for a reversal candlestick pattern as an indication that the price is going up again.
You’ll also notice that the BB lines can be far apart, or closer together. The further apart the lower and upper bands are the more volatile the market is at that moment. When these lines are close together and stay close together, it means the market is preparing itself for a breakout. This breakout can go up or down, there are other indicator (like RSI for example) that can help you predict that.