How to Use Bollinger Bands – Strategy and Tips

Bollinger Bands (sometimes Bollinger Bands) – what are they and how are the Bollinger Bands indicator used? In order to more accurately assess the likelihood of one or another variant of price changes in the future, the
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 this. Bollinger Bands Indicator:
The use of technical analysis is based on the application of other principles. It is believed that changes in quotations in the past can predict the likelihood of price increases or decreases 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 decision-making by traders. In practice, the methods of technical analysis have proven their effectiveness. However, it should be borne in mind that for effective work, a trader or investor must create their own trading system or follow an existing one. At the same time, as a rule, several methods are used to make decisions, increasing the chances of achieving success. There are traders who work by applying their professional intuition. However, you need to understand thatthat conclusions are drawn on the basis of certain characteristics of the graphs. Various indicators allow them to be expressed numerically, 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 center line is the average price. It shows the trend of movement and allows you to make an assumption about the general nature of the changes.
2. The top and bottom lines represent the degree of deviation from the center line. The difference between them is the greater, the sharper the changes in quotations occur.

Horizontal Bollinger line [/ caption] When increasing the price is between the upper and central lines, when decreasing – between the central and lower ones. 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 within the first decade after its creation, the indicator gained wide popularity, which remains after decades. It allows you to understand how prices are distributed in relation 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 rules for applying.
High and low volatility on Bollinger bands [/ caption] Standard parameters are often used to form the indicator. On charts with different periods, it is customary to choose the averaging parameter equal to 20. If you use a chart in the form of Japanese candlesticks or a bar, 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 indicate the value of 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 within the band.The idea of ​​using the indicator is that when the price goes beyond the upper or lower line, it is likely to return inside. If the breakdown occurred upward, then this indicates that the market is overbought, and if downward, then it is oversold.

How bollinger bands are used

The use of the indicator under consideration is usually associated with the determination of a promising direction for a transaction. For successful work on the exchange, a trader must determine which trading system he will use. To do this, you need to understand exactly what action needs 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 channel. In the first and second cases, it can be argued that it is trending. If the quotes rise, then it is profitable to buy the asset, and if they fall, then sell. Trend indicators provide an answer to the question of which of these situations occurs.Bollinger bands can perform this function in the trading system. Useful QUIK functions – indicators RSI, MACD, Bollinger Bands: https://youtu.be/jMjVqSxQdxU The indicator can also be used to determine the targets of selling or buying. Its lines show where you can withdraw profits. Similarly, using Bollinger Bands, you can determine the stop level in your trades. A narrowing or widening of a band indicates the level of volatility and market trend. A narrow, inclined strip indicates more strength of movement. If it expands, then some traders see this as a sign of an imminent termination of the trend. 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 targets for selling or buying. Its lines show where you can withdraw profits. Similarly, using Bollinger Bands, you can determine the stop level in your trades. A narrowing or widening of a band indicates the level of volatility and market trend. A narrow, inclined strip indicates more strength of movement. If it expands, then some traders see this as a sign of an imminent termination of the trend. 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 targets for selling or buying. Its lines show where you can withdraw profits. Similarly, using Bollinger Bands, you can determine the stop level in your trades. A narrowing or widening of a band indicates the level of volatility and market trend. A narrow, inclined strip indicates more strength of movement. If it expands, then some traders see this as a sign of an imminent termination of the trend. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement.A narrowing or widening of a band indicates the level of volatility and market trend. A narrow, inclined strip indicates more strength of movement. If it expands, then some traders see this as a sign of an imminent termination of the trend. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement.A narrowing or widening of a band indicates the level of volatility and market trend. A narrow, inclined strip indicates more strength of movement. If it expands, then some traders see this as a sign of an imminent termination of the trend. If the indicator narrows strongly during a sideways trend, then this indicates a high probability of an explosive movement.

Pros and cons

The application of the indicator in question creates a detailed picture of the price movement. Understanding the principles of its work allows you to draw the necessary conclusions when deciding on a deal. An example of using the Bollinger Line indicator:
The use of 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. The definition of overbought or oversold of an asset is available.
4. Together with other indicators, it can be used to find the moment to enter or exit a trade.

When using it, one must take into account the presence of such disadvantages:

1. Although Bollinger Bands are a very informative indicator, they do not provide any guarantees of absolute prediction accuracy . It is impossible to exclude the influence of random circumstances that can negatively affect the profitability of the trade.
2. Since the average value is used taking into account the last 20 bars, this indicator has a lag . This is a common property of those indicators that are based on the use of calculating the average.
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 . Likewise, other signals can create ambiguity in the future.

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

Building

The plotting rules are as follows:

1. First, you need to calculate the moving average. Usually, to get it, the arithmetic mean of the Close values ​​of the last 20 bars is used. The developer used a simple average to calculate, he said, in order to apply the same method to plot the centerline and get the deviations.

Bars that are taken into account in calculations

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

Using one standard deviation In the terminal with which the trader works, the calculation is performed automatically, allowing this information to be taken into account in time for making a decision. Applying three standard deviations

Bollinger Band Strategy – 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. Below are a few examples to illustrate the application.

Rebound from borders

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 upward, and the second time it is directed downward. It can be seen that after each of them the price comes back. To make the signal more reliable, it is checked whether the trade is confirmed using a stochastic. In the first case, you can see how the stochastic exceeds 80, and then goes back. In the second case, the stochastic line goes 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 to analyze: https://youtu.be/uWWicKxmulg

Reaching target level

This example is partially similar to the previous one. The trade is entered after the breakdown of the band edge and return. However, another important aspect of making a deal is considered here – the right way out. To do this, the trader must indicate at what level of profit he can close the deal. To do this, he must indicate the target price value 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 desired direction further. Setting the target of the transaction in this way provides a high probability of making a profit, but does not guarantee that it will be the maximum possible.
Time to buy [/ caption]

Sloping support or resistance lines

In the chart shown here, the red arrows show 4 bounces from the centerline during a down trending move. These cases are good times to enter a sell trade. You can see that on this chart, the first three trades would be successful if closed after crossing the lower line. The latter, due to the change in the direction of the trend to an upward one, will not lead to a quick intersection with the lower line. In order to limit losses in the latter case, it is enough to place a stop on the center 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 bounce can be considered in a growing market as a resistance line. When, during further movement, the quotes pass it, this indicates the strength of the movement and allows you to use this moment to enter a deal or build it up. A stop can be placed immediately after each resistance line, providing an almost breakeven further development of the transaction. Considering the chart shown as an example, it can be seen that such a stop will be triggered only after the last of these lines is crossed. 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. Determine which of them the trader should need, determiningwhat trading system he plans to work with.

Terminal use

Bollinger Bands have long been considered a classic technical analysis tool. Therefore, in most cases, they are included in the number of pre-installed technical analysis tools. The procedure for calculating the indicator:
To use it, you need to open the required 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), indicating the type of price to be processed (Close), The number of root-mean-square calculations that are 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 peculiarities. 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.