Using Bollinger Bands For A Winning Trading Strategy

The goal of trading crypto, stocks, and all digital assets alike are to make money. Throwing cash at crypto and hoping for the best is not a winning strategy. To trade successfully, certain levels of expertise must be learned, back-tested, and understood.

There are two ways to do market research: fundamental and technical analysis. The former is concerned with a company's technical, technological & financial standing, whereas the latter is concerned with the price movement of its stock. When it comes to technical analysis, Bollinger Bands are an essential instrument. They may be used to assess stock volatility and price movements, respectively. Knowing how to utilize Bollinger Bands and what they may tell you about a stock if you're using technical analysis to build a portfolio is helpful.

What Is a Bollinger Band

A standard technical analysis indicator, Bollinger Bands, is employed by traders to gauge the volatility of a given financial asset. This indicator comprises a simple moving average, a band above it (the positive standard deviation), and a band below (the inverse standard deviation or the negative standard deviation). The famed technical analyst John Bollinger, who established this indicator in the 1980s, inspired the indicator's moniker.

In contrast to simple moving averages, Bollinger Bands add standard deviations to guarantee that price activity is tracked inside the confines of a channel. Bollinger Bands have the additional advantage of being extremely bendable.

An example is dynamic in responding to diverse market situations and trading various financial products, such as stocks. Therefore, traders of all kinds may find them appealing. There is nothing complicated about the Bollinger Band computations. Simple moving averages (SMAs) are used to determine the middle band.

The top, middle, and lower bands form the Bollinger Band. The location of these bands reveals how strong the trend is and the projected high and low price levels soon. The trader sets the settings for the middle band, which is a moving average. Bands are placed on both sides of the moving average band—the number of standard deviations that the volatility indicator needs can be adjusted to the trader's needs. There are two ways to calculate the distance between the middle and upper and lower bands: counting standard deviations and multiplying that number by 2.

Using Bollinger Bands to Day Trade Uptrends

It is possible to utilize Bollinger Bands to assess the strength of an asset's rise and when it could begin to decline. It is common for an upswing to reach the top band if strong enough. When an uptrend hits the whole band, traders might take advantage of the opportunity to buy the asset.

A significant amount of strength is shown if the price swings back up in uptrends while remaining above the middle band and returning to the upper band. Price in an uptrend should not cross the lower band, which is an early warning indication that the stock is losing its momentum or that the uptrend has ended.

The strength or weakness of an uptrend is monitored by technical traders who look for signs of a potential trend reversal. It is common practice for technical traders to take advantage of solid uptrends before turning. This is when most traders sell an asset to minimize the risk of losing money if the trend reverses.

Using Bollinger Bands to Day Trade Downtrends

The Bollinger Bands may predict how much an asset is declining and when it might turn around and head in the other direction. When the price is in a severe downturn, it follows the lower band, indicating intense selling pressure. As long as the price does not reach or advance along with the lower band, it may be a sign that the downtrend is losing steam.

When the price swings back to the lower band after a price retreat (high), the downtrend is quite strong. During a downtrend, prices should not break above the top band, as this might suggest that the trend is reversing.

During downtrends, many traders stop trading except for a buying opportunity when the trend begins to shift. Both brief and long-term periods of downtrends are possible; the latter can span from minutes to months to years. Investors must be on the lookout for any early signs of a downturn to protect their money. There is a danger in establishing long positions if the bottom bands indicate a consistent downward trend.

Conclusion

Bollinger Bands are a lagging indicator, which is common among technical indicators. Although Bollinger Bands are an excellent tool for technical traders, there are several drawbacks. Reactionary rather than predictive, the Bollinger Bands can't necessarily foresee price fluctuations. The price of many price bars is averaged using a simple moving average.

Bollinger bands don't necessarily signal oversold or overbought circumstances merely because a price crosses them. Also, the bands should not be used to create price predictions by traders. It will be in your best interest to add two or three non-correlated indicators that provide more direct market signals to be used in addition to Bollinger Bands.