What are (BB) Bollinger Bands?
Trading cryptocurrencies is not easy especially for beginners as crypto markets react much quicker to big moves and events. This is precisely the reason why a technical indicator like Bollinger Bands, (that considers volatility in the first place), can help you to analyze the price action and improve your decision-making and overall trading performance.
Using Bollinger Bands can help you to identify the direction of the trend and if the trend has been exhausted, it can mitigate the risks when figuring out entry points, and provide you with hints for proper timing to stop or when to expect a breakout.
What is BB?
Bollinger Bands are one of the most popular technical indicators in the world and is used by many traders. This indicator was developed in the 1980s by John Bollinger and was intended to be used for analyzing stocks. Decades have passed and it still remains a favorite indicator among professional traders.
As a volatility indicator, which is used to determine how high or low the price is relative to previous closes, this tool not only works well in the traditional market, but remains imperative in cryptocurrency trading as one of the main characteristics of cryptocurrencies is volatility.
How do (BB) Bollinger Bonds work?
Bollinger Bands indicate whether the market has high or low volatility and overbought and oversold conditions.
This indicator consists of an upper band, a middle band, and a lower band. The middle band is a simple moving average that is usually set at 20 periods.
Middle line: 20-day simple moving average (SMA)
Upper band: 20-day SMA + (20-day standard deviation x2)
Lower band: 20-day SMA — (20-day standard deviation x2)
The two outer bands expand (move away from the middle line) when volatility is high. When the bands are squeezed (move closer to the middle line), the volatility is low.
Generally, an asset is considered overbought when the price approaches (touch) the top Bollinger band and oversold when the price approaches (touch) the bottom band.
To find this tool on NiceX TradeView simply click on the “Indicators” button and search for BB (Bollinger Bonds)
When trading cryptocurrencies you can also use Bollinger Band variations, for example Bollinger Bands Width and Bollinger Bands %B. These tools are also implemented into NiceX TradeVeiw.
What do you need to know about trading with BB?
Bollinger Bonds is a popular and very useful indicator. There are several ways you can use it to have a better picture of the trend direction and get hints about future market moves. But as with many other tools it does not predict the future. As usual, the longer the time frame, the more reliable the signals are. To get better and more accurate results, try to analyze the market trend using different timeframes and use BB combined with other technical indicators.
How to use BB when trading crypto?
There is no difference between using Bollinger Bands in the classic market or trading cryptocurrencies but as digital assets are more volatile you are likely to see more market moves and get more signals from Bollinger Bands.
It also makes more sense to set the Bollinger Bands correctly, depending on what kind of trader you are. You can change the Simple Moving Average (SMA) and bands to match your trading style.
It is usually recommended to have SMA with period 10 and bands at 1.5 for Day Trading, SMA with period 20 and bands at 2 (default parameters) for Swing Trading and 50-day SMA and bands at 2.5 for Position Trading.
In NiceX TradeView you can change these in the settings as shown below.
What trading strategies can I use with BB?
Usually when the bands are narrowed during low volatility periods and lines are getting closer to each other, it makes sense to be ready for a breakout in either direction.
Bollinger Squeeze — a strategy to use during low volatility. When the bands “squeeze together” more and more you should prepare for a breakout. If the price starts to break out above the top bands, there is a possibility that the price will continue to grow and it is a good time for opening long positions. The same if the price breaks out below the button band it is likely it will continue to go down.
Bollinger Bounce is a trend reversal strategy whose main idea is that the price tends to bounce back to the middle whenever it touches one of the bands. So when the price touches the Bollinger Bands’ upper line, traders would usually go short, and vice versa.
There are many different strategies to use during the uptrend and downtrend and interesting patterns as W-bottoms and M-tops to research if you want to put the BB indicator to it’s full capacities.
Bottom line
Bollinger Bands can be a very useful tool if you are a crypto trader, it is a reliable indicator and has been in chart analysis for decades.
After doing some research, gaining experience and tweeking BB to suit your trading style you will have a better chance to understand BB and read its signals.
Keep in mind that Bollinger Bands are not a standalone trading system. It is designed to provide traders with information regarding price volatility and works best when combined with other technical indicators.
Try it out
Learning to trade with indicators can be a complex process. If the BB indicator appeals to you, you can research it even further.
The more you will practice, the more comfortable you will become with your trading. Navigate to NiceX Exchange, start practicing and gain your confidence!
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The original article is here: https://www.nicex.com/blog/post/what-are-bollinger-bands?lang=en
