How to Use Bollinger Bands – Strategy and Tips

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:
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.

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.

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.

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.

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

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:
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.