What are Bollinger Bands?

In the last trading training lesson, we talked about what moving averages were and how we could take advantage of this indicator for our trading. Volatility has been the factor that has predominated during this current year, shaking all financial markets to unimaginable levels... In coalition with the previous post, today we are going to talk about Bollinger bands and how we can take advantage of them for our operations based on strategies .

What are Bollinger Bands?

Bollinger bands are an indicator for technical analysis that is widely used by traders in different markets, whether stocks, commodities or cryptocurrencies. This indicator was developed by John Bollinger (hence its name) during the 1980s. This indicator allows us to identify different characteristics within an asset, such as the ongoing trend, overbought and oversold levels or trend reversals. Bollinger bands are made up of three lines. The upper band is calculated by taking the middle band and adding twice the daily standard deviation to that amount. The lower band is calculated by taking the mean band minus two times the daily standard deviation.

How do Bollinger Bands work?⚙️​

Now that we have seen the basic points that Bollinger bands are made up of, let's continue with the trading training on Bollinger bands to see how they work. Bollinger bands allow us to visualize the moments in which the price of an asset begins to sideways or move with volatility. We must look at the moments when the price begins to fluctuate up or down to enter the market. We can usually identify these contractions when we see the price moving in an increasingly tighter range. As it flows from the upper band, it then rests on the middle band area and ends up touching the lower band.

This process is repeated consecutively, as if the bands were magnets and the price was sliding between them as such. The moment we should observe is when we see the price located in a narrower channel compared to the contraction cycle. At this moment is when the price is deciding the direction it is going to take, to finally break the zone and start a movement, which can be up or down.

Is there any strategy for our trading training?

Of course, as in all trading training, if we do not teach you strategies we will not be able to see the real usefulness of each indicator. Let's see what strategies we have available to use with Bollinger bands:

Overbought and oversold zones.紐‍♂️​

Bollinger Bands help us identify situations where an asset is in an overbought or oversold zone. When we see that the price of an asset slides outside the lower Bollinger band, we can interpret that the price has fallen too much. This may be a sign that the price is about to rebound. On the other hand, if the price breaks above the upper band, the asset may be entering an overbought zone. This may be a sign that the price is preparing for a pullback. In this way, we can buy or sell the asset in question when it is leaving these bands. We can also help ourselves by looking at how far the price is from the average.

Of course, it should be noted that we cannot rely 100% on this strategy, given that in a strong trend the strategy can easily take us out of the market. We must wait for confirmations that allow us to enter the market safely and efficiently. For example, we can look at the general direction of the price, and only enter the market when the operation is aligned with the current trend.

Multiple bands for better signals.️​

Bollinger bands measure price deviation, which is why the indicator is very useful for defining the direction of trends. The second strategy of this trading formation is to take advantage of the magic of Bollinger bands to create a secondary channel with one standard deviation and then other bands with two standard deviations. Let's call them double bollinger bands. In this way, we will be able to see the most defined price trend and in turn identify possible price reversals. To be able to operate using this strategy, it is enough to look at the inclination of the Bollinger bands before considering the operation. With the configuration of the double bands, we have three defined zones that allow us to easily operate this strategy:

This area is defined by the upper bands of the Bollinger bands, where we see how the bullish path that the price makes in an upward movement marks us. Sell ​​zone: Contrary to the buy zone, when we see that the price is between the two lower bands, we can see how the downward path of the price is delimited. Indecision zone: At the moment when the price moves away from one of the two zones (buying and selling), we must observe where it is going to see a possible price reversal. In this way, this area helps us determine trend changes.

Bollinger Bands Squeeze Strategy.​

The last strategy in this Bollinger Bands trading training is about taking advantage of insights. As we have been commenting throughout this article, the price experiences contractions when the price comes from a period of high volatility, which requires a break to regain strength. The moment we see that an asset little by little has its Bollinger bands closer and closer together, a movement is consolidating.

Finally, when the movement has been consolidated, the price begins a larger movement in one of the two directions. We can identify this type of volatility by a volume expansion on a breakout. Then, when the price breaks through the upper or lower band, we buy or sell the asset and then set a stop-loss order outside the consolidation zone on the opposite side.

Conclusions on Bollinger Bands.​

As we have seen throughout this trading training, Bollinger bands are very useful for us to be able to identify moments of volatility and lateralization in an asset. We remember as always that since they are indicators they are not giving us 100% reliable signals, we must combine this indicator together with others such as volume, or advanced indicators that allow us to combine this indicator together with another that gives us more precise confirmations of entries. Let us also remember that the price can slide far beyond the parameters of the same bands, which is why we always remember to use a loss limit when we operate to avoid ending up liquidating our account.