What are the Bollinger Bands?
Bollinger Bands is a technical indicator developed trademarked by prominent trader John Bollinger.
This indicator is used to measure market volatility and in other instances to trade on trend reversals.
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In short, Bollinger bands tell you whether the market is LOUD or whether the market is quiet.
How is it calculated?
Well, Bollinger bands are made up of 3 lines:
- A simple moving average (SMA) line located in the middle of the lower and the upper bands.
- Two lines located two standard deviations away from the SMA on both sides; positively and negatively (the upper and the lower bands)
And that is where it got its name ‘bands.’
Moving on, Bollinger bands is a highly customizable indicator.
What does this mean?
It means you can adjust the indicator’s setting based on your personal preferences.
For the mainline, you can decide to use the exponential moving average instead of a simple moving average. Indeed the two are moving averages, but the EMA puts more weight on the most recent data as compared to the SMA.
It is also worth noting that the Bollinger bands cover 95% of the price action. And therefore, it is rare to find the underlying asset trading above the upper band or below the lower line (band).
However, if the price moves outside the bands, you can still cash in on price action by trading on a trend reversal.
Understanding Bollinger bands in Expert Option.
Up to this point, what we have done is just give an intro to this indicator.
But the question is, how do you read Bollinger bands signals and hopefully predict the market movement?
That is what we are going to answer in a few.
Commonly, the width between the upper and the lower bands is what most traders assume represents the price deviation from the price initial average (as measured by the middle line, the MA).
On the same note, the upper band (which is positive two deviations away from the centerline) can be taken to be the resistance while the lower band (negative two standard deviations away from the MA) is considered the support.
Even though the two lines are constantly moving, they represent the specific price of the underlying asset at a specific time.
Therefore, it means that the support and resistance levels are created every time the underlying price changes.
Take a look at this example:
Let’s say the asset you are currently trading found support price at 70.23 and resistance price at 75.34.
Assuming, there was a sudden surge of the price and went up to 81.02 before dipping to 76.45.
In that case, 81.02 will be your new resistance price, while 76.45 is your new support price.
Now, before I show you some of the Bollinger bands strategies you can implement immediately on Expert Option, let me first show you how to add this indicator to your trading chart.
How to add Bollinger bands indicator to Expert Option trading chart.
The truth is, you cannot benefit from Bollinger bands signals if you do not first add it to your charts.
Equally important, you need to be able to distinguish between the three lines used by this indicator.
For this reason, follow these steps to accomplish that in less than 1 minute:
- Login to your Expert Option trading account and locate the indicators tab on the top right corner, next to the trading asset.
- If you aren’t already registered in Expert Option register here.
- Click on this tab and select the Bollinger bands from the list.
- Adjust the indicator’s settings: select the period, deviation percentage, the colors of the lines along with their widths.
- Click Apply to add the indicator to your trading chart.
Congratulations, you just added the Bollinger bands indicator to your chart on Expert Option.
How to interpret Bollinger bands signals on Expert Option.
Reading volatility signals is arguably the most useful feature of Bollinger bands:
Then the ability to auto-correct whenever price fluctuations kick in.
With these two features, you can easily tell the prevailing market condition by just looking at the width of the bands (distance between the upper line and lower line).
Let me explain using an example:
Whenever the bands remain closer together for quite some time, this is a signal that the market price action is weak and you should sit tight waiting for an apparent trend to be created.
Conversely, if the bands’ width suddenly bulges, this can be both an indication of an impending trend in the market and volatility. Prepare to open a trading position because the market is about to throw an entry point your way.
With that said, how do you know when to buy and when to sell by reading the Bollinger bands indicator on Expert Option?
Based on what we have looked at, there are two scenarios that you should trade when using Bollinger bands:
1. The Bollinger bands breakout.
As I mentioned earlier, candlesticks, area charts,s or whichever chart you are using will remain in the middle of the bands 95% of the time.
But if the price breaks out of either the bottom or top band, that’s a big event.
Make no mistake though, this is not a sign to either buy or sell.
Because Bollinger bands breakouts do not provide information on the direction or even the extent of price action soon.
But if you pair Bollinger bands with another indicator like the relative strength index (RSI) and a volume indicator, you can easily determine where the price will move next, after the breakout.
2. The Bollinger bands squeeze.
The squeeze is when the bands (upper line and the lower line) come closer together, hence restraining the movement of the moving average.
As mentioned earlier, Bollinger’s squeeze is a sign of low volatility. This is a good thing for one reason though,
Low volatility now indicates the possibility of high volatility shortly, which is a tradable opportunity.
On the other hand, if the bands start moving away from each other, it’s a sign of increased volatility, go ahead and trade on the direction of the trend.
Wrapping things up
Bollinger bands indicator is the best trend following indicator. However, like all the other technical analysis tools, it does not guarantee 100% correctness.
It is recommended that you pair it up with other indicators on Expert Option.