BOLLINGER BANDS EXPLAINED
You might have not heard of John Bollinger, but we’re sure you’ve heard of Bollinger Bands®. Well, this John that you don’t know is one of the most important analysts of our generation and, you guessed it, he’s the creator of the Bollinger Bands®.
Simply, Bollinger Bands® depend on Moving Averages and their standard deviation. As you read the article, you’ll get to learn more about the concept behind these bands. Don’t hold your breath much longer, jump right in.
According to Investopedia: “Bollinger Bands® is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of an instrument's price, but which can be adjusted to user preferences.”
So, this tool sets the limits an instrument should trade within. These boundaries help traders estimate volatility highs and lows as well as the overboughtness and oversoldness of the instrument.
Now that you’ve got a general idea about Bollinger Bands®, we’ll explain to you how to insert them in your trading platform, to give you a better understanding of its usage.
Based on the popularity of these platforms, we’re going to explain how to add Bollinger Bands® to your MT5.
The picture below is from our MT5 chart, where it’s quite simple to add Bollinger Bands®. Firstly, you have to go to the Insert Tab, select Indicators, then Trend, then select Bollinger Bands®, et voila!
The dialogue box below should appear right after you select Bollinger Bands®. Here you can play around with these bands and customize them to your own benefit.
How to customize the Bollinger Bands®
The dialog box above has three tabs. Each tab is responsible for changing a specific aspect of the Bollinger Bands®.
Go on reading to find out about the specifications of each one of these tabs. For starters, let’s learn more about the Parameters.
Using the Parameters allows you to adjust the line of the Bollinger Bands®. Make sure you select your Period because it’s of great importance. The Period is set at 20 by default. So your indicator will automatically take into consideration the last 20 candles when calculating the bands and the SMA.
You’re free to change the level of the Period. Find one that suits your trading style.
In the Parameters tab, there’s a Shiftsection and it’s responsible for shifting the Bollinger Bands® as a whole to the right by the number of periods that you specify. By default, Shift is set at 0. You’re free to change it to the level you want. Pay attention when you’re changing this level around because entering a positive number shifts the bands to the right and entering a negative number shifts them to the left.
The third part of the Parameters tab is the Deviations. It’s the number of standard deviations that the indicator takes into consideration, so technically speaking, it’s the distance from the SMA. By default, the indicator takes 2 standard deviations. Even in this feature, you’re free to change the level to the one you see fit.
Most of the movements happen between 1 and 2 standard deviations, so if you move them higher, you’d be muting your Bollinger Bands®. They’d become unclear.
Then there’s the Apply Tosection which focuses on the numbers the indicator should take into consideration. So by default, that number is the close of each candle, however, I personally like to take the HLC/3, which is the High+Low+Close divided by 3. Honestly, it’s a much more accurate number and it will give you a clearer picture. Try it, you won’t regret it.
To those who are creative by nature, the Style is for you guys. Using the Styleoption, you can set your own colours and line styles.
Moving on to the second tab which is the Levelstab. This feature is quite handy for those who’d like to have more lines on their Bollinger Bands®.
The levels you’re going to select will be affected by the number of deviations you’ve previously selected.
Let’s say you’ve got 2 deviation set, and you add the 50% level, it would be as if you are adding the 1 deviation line as well to the mix.
Things are starting to get clear, right?
Remember that everything positive appears on the top side of the bands and everything negative appears on the lower side of the bands. So how would you show both sides? Easy, you have to add the positive and the negative numbers, otherwise, only one side would show.
This is the third and last tab, Visualization, and its name helps us guess it has to do with the way we see the Bollinger Bands®.
Basically, the Visualizationtab helps you choose where the Bollinger Bands® will appear, ie, at which time frames. As you can see in the screenshot above, All timeframes is selected, which means that you get to see the indicator at all timeframes.
Remember this is the customization section, so everything is adjustable here. Trial and error is the best way to find out which values best suit your trading style.
Bollinger Bands® are insanely popular with the traders, and here’s why traders like this indicator.
There are several ways to use the Bollinger Bands®, but we’re going to tell you about the main two.
The squeeze is an essential concept of Bollinger Bands®. The bands come close together and constrict the moving average and this is what we call “a squeeze”.
A Squeeze is a very good signal for a period of low volatility. Traders see it as a sign that the volatility levels will go upwards and with that trading opportunities come rolling in.
On the other hand, when the bands move apart, it’s very likely there’ll be a downfall in volatility. You’ll find the traders then, exiting trades.
These conditions aren’t trading signals. The bands don’t give indications of when the change may take place or in which direction the price is moving. So you should take into consideration the direction the instrument might move in. Always make sure that the juice is worth the squeeze.
Almost all the price action occurs between the two bands. This proves that any breakout above or below the bands is a major event. The breakout isn’t a trading signal though, okay?
Don’t convince yourself that the price hitting or exceeding one of the bands is a signal to buy or sell. Most people believe that, be among the wise few!
Breakouts provide no clue as to the direction and extent of future price movement, keep repeating it until it sticks in your head.
Don’t over think it, just go for it and use the Bollinger Bands®in your trading strategy right now. After reading the article above, we’re sure you’ve got it. Don’t hesitate and try it now!
Read all about Fibonacci Retracement and how to identify key support and resistance levels.
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