Wednesday, 24 January 2018
Bollinger Bands: Are They Any Good?
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If you are giving your first steps in trading,
we are almost entirely sure you’ve heard about “Bollinger Bands”. However, the
large amount of information out there can be confusing.
For that reason, we put together a simple, yet
useful explanation about them with a practical approach so you can start using
them right away. Let’s begin!
Basic notions
Bollinger Bands - a technical indicator
developed by John Bollinger to gauge the volatility of a given asset. The tool
is especially useful to identify periods of market stress.
How it works
The two bands that integrate the indicator
expand when market is facing high volatility, while in periods of quietness
they create a narrower channel.
What you should look at
If you were expecting to get a mathematical
formula here, you came to the wrong blog. In fact, we think it is much easier
and practical for you to get the sense of how it works and how you can apply
Bollinger Bands in your trading.
Bollinger Bounce
The most common idea behind Bollinger Bands
and why many traders use this simple indicator is because price tends to always
return to the middle of the channel.
When the price reaches the top of the channel,
it will most likely turn downwards. The same logic goes viceversa. Therefore, a
trader could speculate an open a bullish position when price hits the lower
band and set a take profit order near the upper band.
In this case, a trader uses Bollinger bands as
resistance / support levels. If you are trading in short timeframes, using
Bollinger bands might not be the best indicator for you and you could see many
breaks above and below them that will distort your signals.
Bollinger Squeeze
When price goes beyond the upper or lower
band, causing the channel to quickly expand. If the price breaks above the
upper band, you should expect a rather solid upward extension. And the same
goes for a break of the lower band.
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