Bollinger Band: How To Trade With It In The Crypto Chart?

Bollinger Bands are one of the technical indicators that crypto traders use to gauge volatility and find profitable entry and exit points. Technical trader John Bollinger created Bollinger Bands, to help recognize when an asset is oversold or overbought. In this article, we will walk you through the major types identified with the Bollinger Band and how to trade in such a situation.

Key Takeaways

  • Bollinger Bands signals oversold or overbought occurrence.

  • An overbought signal may be present when the price is consistently above the upper Bollinger Band.

  • A 20-day simple moving average is used for the upper and lower bands, which can be adjusted to be 2 standard deviations plus or minus.

What is a Bollinger Band?

The bands are a component of a volatility indicator that determines how high and low a token’s price was in relation to earlier trades. The standard deviation, which alters as volatility increases or decreases, measures volatility. The bands enlarge and contract in response to changes in price, respectively. The dynamic nature of Bollinger Bands makes them suitable for trading various coins.

In order to assist investors in determining when an asset is oversold or overbought, technical trader John Bollinger developed Bollinger Bands.

Read more: Exponential Moving Average: How To Leverage It In Crypto Market?

What does bollinger bands indicate?

J. Bollinger developed a set of 22 guidelines for using the bands as a trading strategy. The closer prices get to the upper or lower band, and many cryptocurrency traders think the market is more overbought or oversold.

  • The Squeeze: The fundamental idea of Bollinger Bands is the “squeeze.” A squeeze occurs when the bands constrict the moving average as they get closer to one another. A squeeze denotes a time of low volatility. Traders see this as a precursor to future volatility increases and potential trading opportunities. In contrast, the likelihood of a drop in volatility and the likelihood of exiting a trade increase as the bands move farther apart. These situations do not constitute trading signals. The bands need to show a potential change’s timing or potential path for price movement.
  • The Breakouts: The two bands contain about 90% of the price movement. Any breakout between the bands or above them is important. Many investors mistake the breakout, which is not a trading signal, for a buy or sell signal when the price touches or crosses one of the bands. Breakouts must determine the scope and direction of future price movement.

How to trade with different types of Bollinger Bands?

Here are a few major sub categories of Bollinger Bands and ways how to trade with them.

  • Reversals: A basic but successful trading strategy is to fade stocks when they begin printing outside of the bands. We’ll develop this strategy further by adding some candlestick analysis to it. For instance, wait to see how it performs rather than shorting a coin as it nears its upper band limit. When the coin trades near the outside of the bands, goes parabolic or gaps up before closing near its low, it is frequently a sign that the stock will soon correct.
  • Double Bottoms: A double-bottom Bollinger Band pattern is quite common. High volume and a sharp price decline that closes outside of the lower Bollinger Band define the first bottom of this formation. Typically, actions of this nature trigger an “automatic rally.” The automatic rally’s high typically acts as the initial barrier to base-building before the stock rises. Immediately following the rally’s start, the price attempts to retest the most recent lows to gauge the strength of the buying pressure there.
  • Riding the Bands: Bollinger claims that touching either the upper or lower band does not represent a buy or sell signal. As the result, price penetration of the bands cannot be used as a defence for shorting or unloading a stock.
  • Bollinger Band Squeeze: Identifying the start of a squeeze is a different trading strategy. The hypothesis is that volatility will increase on daily charts when the indicator reaches its lowest point in six months. This relates to the bands that we previously mentioned being tightened. A significant move is projected when the Bollinger Band indicator begins to constrict. Since these setups can deceive even the most seasoned traders, we need a competitive edge when trading a Bollinger Bands squeeze.
  • Middle Bands: Many price charts set up the middle band as a 20-period simple moving average. The middle line can serve as areas of support during pullbacks when the stock is moving in a band pattern. Failure of the stock to maintain acceleration outside of the bands suggests a weakening in the stock’s strength, which help in identifying when a trend is losing steam.

Bottom line

These were the popular Bollinger Bands patterns among the crypto investors. This list, however, is not conclusive. However, a trader’s instinct works above all patterns, indicators, and strategies.

Read more: Pennant Pattern: How To Identify Pennants On A Crypto Chart?