Trading - Bollinger Bands

What are Bollinger Bands?

Bollinger Bands consist of three lines drawn on a price chart:

• The Upper Band: Simple moving average (SMA) plus two standard deviations.
• The Lower Band: The simple moving average minus two standard deviations.
• The Median Line: The simple moving average over a given period (usually 20 periods).

These bands expand and contract with market volatility.

How are Bollinger Bands calculated?

1. Simple Moving Average (SMA) :

   • SMA = (Closing price of last 20 periods) / 20

2. Standard deviation :

   • Standard deviation (σ) = √[(Σ(Price - SMA)²) / 20]

3. Top band :

   • Upper Band = SMA + (2 x Standard deviation)

4. Lower band :

   • Lower Band = SMA - (2 x Standard deviation)

Interpreting Bollinger Bands

Bollinger Bands can be interpreted in several ways to identify trading opportunities.

1. Overpurchase and Resale Conditions :

   • Overbought : When the price touches or exceeds the upper band, this indicates that the asset is potentially overbought, and a downward correction could be imminent.
   • Out of stock : When the price touches or falls below the lower band, this indicates that the asset is potentially oversold, and an upward rebound could be imminent.

2. Bollinger Bands squeeze:

   • A squeeze occurs when the bands tighten around the moving average, indicating a drop in volatility. This often precedes a sharp expansion of the bands, signalling a major price movement ahead.

3. Bollinger Bands Breakout:

   • A breakout occurs when the price crosses the upper or lower band with a sharp increase in trading volume. This may indicate the start of a new trend.

Practical example

Suppose you analyze the EUR/USD chart with the Bollinger Bands. Here's how you might interpret the signals:

1. Overbought :

   • The price touches the upper band at 1.2200. You observe a bearish divergence with the RSI. Consider selling the asset in anticipation of a downward correction.

2. Out of stock :

   • The price falls below the band below 1.2000. You observe a bullish divergence with the RSI. Consider buying the asset in anticipation of an upward bounce.

3. Bollinger Bands squeeze:

   • The bands are tightening around the moving average at 1.2100. You anticipate a strong expansion of the bands and are watching for a possible breakout.

Using Bollinger Bands in Trading

Bollinger Bands are versatile and can be used in a variety of ways to enhance your trading:

1. Trend confirmation :

   • Use Bollinger Bands to confirm trends identified with other indicators or analyses.

2. Timing of inputs and outputs :

   • Use overbought and oversold conditions to identify entry and exit points.

3. Breakout identification :

   • Watch for breakouts to anticipate major price movements.

Conclusion

Bollinger Bands are a powerful tool for traders seeking to identify market conditions and forecast price movements. By understanding how to calculate and interpret Bollinger Bands, you can make more informed trading decisions and improve your results.

We hope this article has helped you better understand Bollinger Bands. If you have any questions or would like to share your experiences, don't hesitate to join us on social networks with the hashtag #xenesy and identifying @xenesy_project. Happy trading!