What are Bollinger Bands?
The Bollinger Bands are another technical analysis that is used to help traders forecast potential shifts in the market. The Bollinger Bands are the namesake of its creator John Bollinger who created the trading indicator in the 1980s. The Bollinger bands essentially act as a moving average which has 2 bands above and below the trendline tracking its movement. The movement is tracked mainly using the mathematical formula of standard deviation.
The Standard deviation shows the average deviation and volatility in price, and the variance of the value of an instrument. As the market moves the volatility is adjusted as a result. So in using this the Bollinger bands act not only as a tracker of the market’s momentum and direction but also as an adjustable measure of volatility.
Guide how to trade using Bollinger Bands
Looking for long or trading opportunities in 2020 using the Bollinger Bands? There are many online brokers like eToro which provide interested investors with the opportunity to trade volatile markets using this indicator and are perfect for long or short traders. If you are interested in getting involved in this rapidly moving market by using the Bollinger Bands indicator, below is the easy process to follow to get started.
Step 1: open a broker account
Step 2: decide your investment level
Step 3: deposit and start trading with MACD
The Bollinger Bands indicator
The indicator is fairly easy to grasp. As explained it consists of 3 lines. The moving average line is the centrepiece and tracks the trend taking place in the market. This is followed by the bands, which are above and below the centre place simple moving average line. The main action of the bands is to contract and expand in response to a change in market conditions via price movement and volatility.
The bands do not show a trader where to enter or an indication of the way the market could be heading towards. It predominantly shows us 4 things.
The upper band shows us when the markets are in a bullish trend, with the potential that they are overbought.
The lower band shows us when the markets are in a bearish trend, with the potential that they are oversold.
The squeeze within the bands shows a trader the increase in market uncertainty and consolidation in price action.
The expansion within the bands shows a trader the decrease in market uncertainty and the extension of trends whether upwards or downwards in price action.
How to set the Bollinger Bands indicator?
Depending on the platform which you are using, it is fairly simple to set up the Bollinger Bands on an actual chart. For us, we will use MT4 with any examples we do as it is one of the most popularly used platforms by new and existing traders. On the MT4 platform once you select the “indicator” list and then go into “trend indicators” you will see the Parabolic SAR listed. Once you choose this, it will give you the parameters to use.
The period of the moving average is by default set to 20, which means depending on the time frame being used it tracks the momentum of the previous 20 candles. The standard deviations by default are set at 2. Depending on the trader and what the are looking for, they can change periods to suit the requirements of what they are looking for.
How can you use Bollinger Bands to buy/sell?
The Bollinger Bands do not traditionally tell you where exactly to buy or sell, however, they can be used in conjunction with other indicators to help develop this conclusion. As mentioned above the upper band and lower band, show us the areas of bullish and bearish trends. However, if a trader wanted to use this information in deciding a potential entry-level they may combine it with say the RSI.
Within the RSI you are able to see where the markets are overbought or oversold so for example now, we see the RSI on the chart above are closer to being oversold, whilst the Bollinger Bands shows we are currently within the lower band. The combination of the 2 may lead a trader to believe that there is potential for a reversal and may look to buy. They could use more indicators like Parabolic SAR to gain further insight into the chances of pending reversals.
Best Brokers for Bollinger Bands analysis
The best brokers for Bollinger Bands are usually those who allow the use of this Oscillator, have a range of liquidity providers and markets, good execution speeds and generally reliable. Trading volatile markets can be risky and expensive, so brokers would need to offer the above and more, to help ease your mind when trading with them at the best cost.
Here is our list of the best brokers for breakout trading: