What Is a Bollinger Band?
Bollinger bands are a technical analysis tool that traders use to see what type of market opportunities there are. The asset’s value has a moving average is then plotted. The whole line is bracketed by a lower bar and upper bar. These lines are actually set apart by two standard deviations.
These different lines from the upper, lower and middle levels are called bands, representing other price channels. These bands are charted over 20 quarters, and these periods might take days or even hours. It will depend on whether the trader takes a short or long-term approach. Many traders will either let their deviations go up or go down depending on the different number of periods.
At the correct core, these Bollinger Bands are actually a particular type of tool that will aid traders to visualize assets that have been overbought or oversold. Based on the trading theory, the faster the price moves towards the upper band, it will mean the market has been overbought. It means this is called the sell signal. However, if the price goes towards the lower band, the market might be oversold, and this is the right time to make a purchase.
The whole concept of these Bollinger Bands was created in the 80s by John Bollinger. He is a proper well-respected trader and is also a market technician. After that, it has turned into a life-breaking trading strategy in different equities and other cryptocurrency markets. Unlike a relatively simple moving type of average that will track the total asset price over a period, Bollinger Bands also help track volatility, giving the traders a large, clear picture of different market trends and other opportunities.
How to Utilize Bollinger Bands in Helping You Do Cryptocurrency Trading
Bollinger bands are also used by different cryptocurrency traders in a similar method used by all the traders on the stock market. It is a unique tool to see if the assets are oversold or overbought. A good trader uses Bollinger Bands to track down the cryptocurrency assets of 20 periods, then decide whether to buy and sell based on the different formations.
One of the main ideas of using a Bollinger Band is called the ‘squeeze’ method, which happens when the bands grow closer together. The movement means more volatility and more opportunities for doing trading. When the Bollinger Bands move further from each other, there is less volatility, a sign that you should not trade the cryptocurrency at the point in time.
However, if the price action exceeds the band limits no matter which direction it is reaching out, it is actually called a ‘breakout’. About 95 percent of the real action is between the bands, and the real breakout is a relatively good price movement. However, a breakout might be misunderstood as a trading signal, and it should be believed as on.
Bollinger Bands are also used to analyze how strong the trading trend is. The price will stick to the upper band if the whole movement is strong. When the total price pulls away from the upper band, then the trend of trading loses steam. For example, if the asset’s price is on a downtrend and remains close to the upper band for a more extended period, a trader will interpret the whole thing as a bearish sign and act according to the situation.
Bollinger Bands play a significant role in trading bitcoins in an automated manner. In such scenarios, traders can use advanced trading bots programmed to recognize and act on different indicators like Bollinger Bands and other main variants.
The M Top Formation
Some traders hunt for a different form called the “M Top”. It is formed when there is a “high” followed by a sell-off followed by the repeat of the first high. The following high might be lower or higher. When the formation forms, the whole Bollinger Band has an analysis to help traders see if an asset is a good uptrend or is currently facing forced resistance.
By studying different basic formations, traders can help go in and out better with greater precision.
Bollinger Bands are a trading tool, and there are different trends and opportunities in the everyday cryptocurrency market. Based on your own analysis, you can study the market and decide if the asset has been overbought or oversold.
Finally, mastered the art of trading? Time to use Bollinger Bands on your trading analysis.