What do bollinger bands indicator

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Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Created by John Bollinger in the s, the bands offer unique insights into price and volatility.

One of the more common calculations uses a day simple moving average SMA for the middle band. The upper band is calculated by taking the middle band and adding twice the daily standard deviation to that amount. The lower band is calculated by taking the middle band minus two times the daily standard deviation. On the other hand, when price breaks above the upper band, the market is perhaps overbought and due for a pullback. Mean reversion assumes that, if the price deviates substantially from the mean or average, it eventually reverts back to the mean price.

In range-bound markets, mean reversion strategies can work well, as prices travel between the two bands like a bouncing ball. During a strong trend, for example, the trader runs the risk of placing trades on the wrong side of the move because the indicator can flash overbought or oversold signals too soon. To help remedy this, a trader can look at the overall direction of price and then only take trade signals that align the trader with the trend.

For example, if the trend is down, only take short positions when the upper band is tagged. The lower band can still be used as an exit if desired, but a new long position is not opened since that would mean going against the trend. As John Bollinger acknowledged, "tags of the bands are just that, tags, not signals. Price often can and does "walk the band. Therefore, the bands naturally widen and narrow in sync with price action , creating a very accurate trending envelope.

Returning to the chart above, we can see how trend traders would position long once price entered the "buy zone. The reason for the second condition is to prevent the trend trader from being "wiggled out" of a trend by a quick move to the downside that snaps back to the "buy zone" at the end of the trading period. You only want to trade this approach when prices trendless. Avoid trading the Bollinger Bounce when the bands are expanding , because this usually means the price is not moving within a range but in a TREND!

Instead, look for these conditions when the bands are stable or even contracting. When the bands squeeze together, it usually means that a breakout is getting ready to happen.

Looking at the chart above, you can see the bands squeezing together. The price has just started to break out of the top band. Based on this information, where do you think the price will go? There are many other things you can do with Bollinger Bands, but these are the two most common strategies associated with them. Go ahead and add the indicator to your charts and watch how prices move with respect to the three bands. Top Crypto Gainers and Losers! See which cryptocurrencies have gone up or down significantly today.

When the bands come close together, constricting the moving average, it is called a squeeze. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade.

However, these conditions are not trading signals. The bands give no indication when the change may take place or which direction price could move.

Any breakout above or below the bands is a major event. The breakout is not a trading signal. The mistake most people make is believing that that price hitting or exceeding one of the bands is a signal to buy or sell.

Breakouts provide no clue as to the direction and extent of future price movement. They are simply one indicator designed to provide traders with information regarding price volatility. John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals. He believes it is crucial to use indicators based on different types of data. Because they are computed from a simple moving average, they weight older price data the same as the most recent, meaning that new information may be diluted by outdated data.

Also, the use of day SMA and 2 standard deviations is a bit arbitrary and may not work for everyone in every situation. Traders should adjust their SMA and standard deviation assumptions accordingly and monitor them. Bollinger Bands. Advanced Technical Analysis Concepts. Technical Analysis Basic Education.

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