Bollinger Bands Analysis -The Basic Part: Not many traders know about this tool but whoever knows makes full use of it. This tool is usually used by professional and experienced traders and helps in spotting short-term price of a commodity.
We will start with the definition and birth of Bollinger bands, and then move to its use in trading. At last, we would end this post with some important points to remember, and a conclusion.
Bollinger Band is a technical market analysis tool developed by John Bollinger in the 1980s. It consists of three different lines; one above the price line, one below it, and one in the middle of both the lines. The middle line is the simple or exponential moving average of the commodity. The other two lines are the standard deviations of the commodity’s price, one negative and one positive.
These lines can also be customized, but it is best to keep them in default. Standard deviation lines calculate the volatility of the asset and show how the price is moving.
What is the use of Bollinger Bands?
Bollinger Bands measure the noise of a price chart, i.e. quiet or loud. In other words, it measures the volatility of the price. When the market is less volatile, the upper and lower line comes closer. And, when the market is too unstable, the lines move apart.
Initially, Bollinger Bands were known as trading bands but, in 2011, John took the copyrights and named it Bollinger Bands.
A price chart with Bollinger Bands looks like the below figure.
So, these were the basics of Bollinger Bands. Now, before closing the article, note some crucial points. These points would help you interpret better the Bands.
Some Important Points to Remember
- If the price line crosses the bands, then the subsequent trend will be followed, i.e. starting of bull or bear market.
- When the price chart touches the mid, moving average line, then it is considered an ideal time for an exit.
- But when the price moves above the band and sells when the price line moves below the bands.
- If bands start coming closer, then it might be a sign of price change.
There are many fundamental and technical analysis tools, both new and old, in the market. But, Bollinger Bands have maintained its position among the traders’ favorite list.
However, as this tool combines moving average device too, and moving average weighs every price as equal. Thus, price fluctuations have taken inappropriately. Therefore, it is always suggested by us to use tools, as per situation and the type of commodity. For instance, Bollinger Bands works well in the short term.