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How to Use Bollinger Bands – Strategy and Tips

Методы и инструменты анализа
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Bollinger Bands (sometimes Bollinger Bands) – what is it and how is the Bollinger Bands indicator used? In order to more accurately assess the likelihood of a particular option for changing prices in the future,
methods of fundamental and technical analysis are used . In the first case, the situation is analyzed taking into account the impact of economic factors. At the same time, it is not always possible to predict exactly how they will affect the value of specific shares. It often happens that important events affect prices too quickly and the trader does not have time to take advantage of it. Bollinger Bands indicator:
How to Use Bollinger Bands - Strategy and Tips The use of technical analysis is based on the application of other principles. It is believed that the change in quotes in the past can predict the likelihood of prices rising or falling in the future. At first glance, this statement may seem controversial, but it must be remembered that the psychology of traders or investors has a significant influence on the decision-making of traders. In practice, the methods of technical analysis have proven their effectiveness. However, it should be borne in mind that in order to work effectively, a trader or investor must create his own trading system or follow an existing one. In this case, as a rule, several methods are used for decision-making, increasing the chances of success. There are traders who work using their professional intuition. However, it must be understood that conclusions are drawn on the basis of certain characteristics of the graphs. Various indicators allow them to be expressed in numerical form, giving better certainty to the methods used. A good indicator accumulates the experience of traders and can become one of the foundations for success. Bollinger bands help answer the question of how sharp price movements deviate from the average. It can be conditionally divided into three lines:

  1. The central represents the average value of the price. It shows the trend of movement and allows you to build an assumption about the general nature of the changes.
  2. The upper and lower lines characterize the degree of deviation from the central line. The difference between them is the greater, the sharper the changes in quotations occur.

How to Use Bollinger Bands - Strategy and Tips
Horizontal Bollinger Band
When rising, the price is between the upper and the center line, when descending, between the center and the bottom. Seeing the relative position of the indicator and quotes, a trader can draw conclusions about further price changes.

Contents
  1. Philosophy and history of the indicator
  2. How bollinger bands are used
  3. Pros and cons
  4. Building
  5. Bollinger Band Strategies – Practical Application in Analysis
  6. Rebound from the borders
  7. Achievement of the target level
  8. Sloping support or resistance lines
  9. Horizontal support or resistance lines
  10. Use on terminals

Philosophy and history of the indicator

This indicator was created by John Bollinger in the 1980s, a Wall Street trader and analyst. Already during the first decade after its creation, the indicator gained wide popularity, which persists decades later. It allows you to understand how prices are distributed relative to the average value of an asset. In the presence of high volatility, the distance between the lower and upper lines increases. John Bollinger wrote the book “Bollinger on the Bollinger Band” which details the application rules.

How to Use Bollinger Bands - Strategy and Tips
High and low volatility on Bollinger bands [/ caption] Often, standard parameters are used to form the indicator. On charts with different periods, it is customary to choose the averaging parameter equal to 20. If a chart in the form of Japanese candlesticks or a bar is used, you need to choose which of their characteristics is taken into account. In most cases, it is customary to choose Close. Since there are several algorithms for calculating moving averages, you need to choose a calculation method. For Bollinger Bands, it is customary to use SMA, a simple average. You will also need to enter the standard deviation. By default, it is 2. If you draw a vertical line, then the distances to the center line from the top or bottom will be equal. The parameters are selected in such a way that in 85% of cases the price is inside the band. The idea of ​​using the indicator is that when the price goes beyond the upper or lower line, it is highly likely to return inside. If the breakdown occurred upwards, then this indicates that the market is overbought, and if downwards, then it indicates that the market is oversold.

How bollinger bands are used

The use of the indicator under consideration is usually associated with determining a promising direction for making a deal. For successful work on the exchange, a trader must determine which trading system he will use. To do this, it is necessary to accurately understand what actions need to be taken in each possible situation. Usually, when creating such a system, several standard elements are used. One of them is as follows. First you need to determine if the market is trending. It may tend to rise, fall or fluctuate in a horizontal corridor. In the first and second cases, it can be argued that it is trendy. If quotes grow, then it is profitable to buy an asset, and if they fall, then sell. Trend indicators provide an answer to the question of which of these situations takes place. Bollinger bands can perform this function in the trading system. Useful functions of QUIK – indicators RSI, MACD, Bollinger Bands: https://youtu.be/jMjVqSxQdxU The indicator can also be used to define sell or buy targets. Its lines show where you can take profits. Similarly, using Bollinger Bands, you can determine the stop level in your trades. Narrowing or widening of the band indicates the level of volatility and trendiness of the market. A narrow sloping band indicates a greater strength of movement. If it expands, then some traders see it as a sign that the trend is about to stop. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement. be/jMjVqSxQdxU The indicator can also be used to determine the purpose of selling or buying. Its lines show where you can take profits. Similarly, using Bollinger Bands, you can determine the stop level in your trades. Narrowing or widening of the band indicates the level of volatility and trendiness of the market. A narrow sloping band indicates a greater strength of movement. If it expands, then some traders see it as a sign that the trend is about to stop. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement. be/jMjVqSxQdxU The indicator can also be used to determine the purpose of selling or buying. Its lines show where you can take profits. Similarly, using Bollinger Bands, you can determine the stop level in your trades. Narrowing or widening of the band indicates the level of volatility and trendiness of the market. A narrow sloping band indicates a greater strength of movement. If it expands, then some traders see it as a sign that the trend is about to stop. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement. Narrowing or widening of the band indicates the level of volatility and trendiness of the market. A narrow sloping band indicates a greater strength of movement. If it expands, then some traders see it as a sign that the trend is about to stop. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement. Narrowing or widening of the band indicates the level of volatility and trendiness of the market. A narrow sloping band indicates a greater strength of movement. If it expands, then some traders see it as a sign that the trend is about to stop. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement.

Pros and cons

The use of the considered indicator creates a detailed picture of the price movement. Understanding the principles of its work allows you to draw the necessary conclusions when making a decision on a deal. An example of using the Bollinger Band indicator:
How to Use Bollinger Bands - Strategy and Tips Using the indicator allows you to take advantage of its following advantages:

  1. You can determine if the market is trending and indicate its direction.
  2. There is information about the level of price volatility.
  3. It is possible to determine whether an asset is overbought or oversold.
  4. Together with other indicators, it can be used to find the moment to enter or exit a trade.

When using it, it is necessary to take into account the presence of such shortcomings:

  1. Although Bollinger Bands is a very informative indicator, it does not provide any guarantee of absolute prediction accuracy . It is impossible to exclude the influence of random circumstances that may adversely affect the profitability of trading.
  2. Since the average value is used, taking into account the last 20 bars, this indicator has a delay . This is a common property of those indicators that are based on the use of an average calculation.
  3. It should be borne in mind that when the price approaches the boundary line, it is possible not only to reflect it, but also to expand the band . Similarly, other signals can create uncertainty in the future.

The use of Bollinger Bands gives more reliable signals when used in conjunction with other indicators. As additional, it is more profitable to use those in the construction of which other principles of calculation are used.

Building

The charting rules are as follows:

  1. First you need to calculate the moving average. Usually, to get it, the arithmetic average of the Close values ​​for the last 20 bars is used. The developer used a simple average to calculate, according to him, in order to apply the same method to plot the center line and obtain deviations.

How to Use Bollinger Bands - Strategy and Tips Bars that are taken into account in calculations

  1. The standard deviation is calculated. Two such values ​​are plotted up and down from the mean line. The deviation is greater, the stronger the volatility. When it decreases, the distance between the upper and lower lines decreases.

How to Use Bollinger Bands - Strategy and Tips Using one standard deviation In the terminal with which the trader works, the calculation is performed automatically, allowing you to take this information into account in time to make a decision. Applying three standard deviations
How to Use Bollinger Bands - Strategy and Tips

Bollinger Band Strategies – Practical Application in Analysis

The use of the indicator is based on its high information content. In combination with other indicators, Bollinger Bands allow you to determine not only the direction of the transaction, but also the moment to enter it. The following are some examples that illustrate the specifics of the application.

Rebound from the borders

How to Use Bollinger Bands - Strategy and Tips In this example, the considered indicator is used together with the stochastic. Red arrows in two places show breakouts outside the band. The first time it is directed upwards, and the second time it is directed downwards. It can be seen that after each of them the price comes back. To make the signal more reliable, we checked if the trade is confirmed using stochastics. In the first case, you can see how the stochastic exceeds 80, and then goes back. In the second case, the stochastic line falls below 20 and then goes up. Here you can see that the situation is suitable for entering a buy or sell deal, respectively. How to trade with the Bollinger Bands indicator – strategies, how to use Bollinger Bands for analysis: https://youtu.be/uWWicKxmulg

Achievement of the target level

How to Use Bollinger Bands - Strategy and Tips This example is partially similar to the previous one. The entry into the transaction is carried out after the breakdown of the edge of the band and return back. However, another important aspect of making a deal is considered here – the right exit. To do this, the trader must specify at what level of profit he can close the deal. To do this, he must specify the target price at which he is going to close the deal. To do this, he uses the middle line of the Bollinger Bands. The chart shows that in the second and third cases, the price continues to move in the right direction further. Setting the target of the transaction in this way provides with a high probability of making a profit, but does not guarantee that it will be the maximum possible. [caption id="attachment_12072" align="aligncenter" width="1175"]
How to Use Bollinger Bands - Strategy and Tips Time to buy

Sloping support or resistance lines

On the chart shown here, the red arrows show 4 bounces from the midline during a down trend move. These cases are advantageous moments for entering into a sell trade. You can see that in this chart, the first three trades would be successful if they were closed after crossing the lower line. The latter, due to a change in the direction of the trend to an upward one, will not lead to an early intersection with the lower line. To limit losses in the latter case, it is enough to put a stop on the central line of the Bollinger indicator.
How to Use Bollinger Bands - Strategy and Tips

Horizontal support or resistance lines

If the indicator is used in a trending market, it can repeatedly touch the outer line and go back. Each such rebound can be considered as a resistance line in a growing market. When quotes pass it during further movement, this indicates the strength of the movement and allows you to use this moment to enter a deal or increase it. Immediately after each resistance line, you can put a stop, providing almost breakeven further development of the transaction. Considering the chart given as an example, it is clear that such a stop will work only after the last of these lines has been overcome. In order to more accurately determine all the necessary parameters of the transaction in this and other examples, it is advantageous to use additional signals received by the indicators. The trader should determine which of them are needed by determining
How to Use Bollinger Bands - Strategy and Tips

Use on terminals

Bollinger Bands have long been considered a classic tool for technical analysis. Therefore, in most cases, they are among the pre-installed technical analysis tools. Indicator calculation procedure:
How to Use Bollinger Bands - Strategy and Tips To apply, you need to open the desired chart on which you want to apply the indicator. When you start it, you will need to enter the parameters required for operation. These include the length of the average (20), specifying the type of price to be processed (Close), the number of root mean square calculations used to calculate the distance from the center line (2). Additionally, you need to specify the thickness and color of the indicator lines. In parentheses are the standard values ​​that traders use in most cases. When using Bollinger Bands with specific charts, you need to take into account that each of them may have certain features. Having learned how to use the indicator and gaining experience, a trader can make changes to the parameters used if he finds a more suitable option for himself.

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