Bollinger bands are an essential tool used by traders to identify and understand when the markets are rallying, consolidating and correcting. Trading is not a process which can be defined just as art or science it’s a combination of both. These are the scores of publicly available indicators and each one claims to be the best in the game.
Bollinger bands are an essential tool used by traders to identify and understand when the markets are rallying, consolidating and correcting. Trading is not a process which can be defined just as art or science it’s a combination of both. These are the scores of publicly available indicators and each one claims to be the best in the game. Nevertheless, either of them are not designed to be perfect or be used in isolation.
Let’s start by knowing more about Bollinger bands, officially created and copyrighted by the Bollinger Bands during the 1980’s. This indicator has a middle band, which is a simple moving average which has a default set at a 20-periods with two outer bands set at two standard deviations below and above the middle band, which is a simple moving average whose default is set at 20-periods with two outer bands set at two standard deviations below and above the middle band. Its most important and generic use is to identify whether the price is high or low on a relative basis. If the price is high or low on a relative basis, the asset is considered to be overbought. But if the price goes down below the lower band, the coin is believed to be oversold.
Nonetheless, there are traders who make the most common mistake of assuming that the asset price will go down eventually when it reaches the upper band, or that the rally will begin when the price hits the lower band. This happens often only when the price is stuck at a range. As with any other indicator, these issues could lead to huge losses in an active market so looking for a merge from a couple of metrics is still a good practice to employ. John Bollinger says assets gets mixed and change between phases of low volatility and high volatility. So after the period of volatility takes place traders expect the volatility to go higher, which could then end up with trending moves.
According to reports, XRP’s volatility dropped down between mid-September to mid-November 2020, it was pointed out as an ellipse on the chart. After two months or so, the volatility increased and the XRP/USDT pair offered an excellent trading opportunity. For instance, Binance Coin (BNB) was facing a downtrend and the volatility tightened between mid-September to mid-November 2018, marked as an ellipse on the chart. In this case volatility widened to the downside and the BNB/USDT pair continued its downtrend. A volatility compression does not foresee the direction of the upcoming breakout. Most of the time the market makers poke the price higher than the upper brand and below the lower band, confiscating the novice traders. Hence, traders try to ignore pre-empting the direction and wait for the price to break above the resistance level or go below the support of the range before choosing a position.
During Oct.22,2020, the bulls propelled the price above the upper band but wasn’t able to clear the resistance at $5.77. Then on Nov.3,2020, the price went down below the lower band but did not break the support at $4.58. Ethereum classic (ETC) went above $5.77 on Nov.18,2020. But this wasn’t an accurate trend as the price did not start a solid uptrend. The market makers tried to search for buyers stops and also tried to hold the bears with the sharp drop on Dec.23,2020. The price increased suddenly and climbed back up the lower band on Dec.24,2020 and the ETC/USDT pair soon began focusing on a powerful move. So, instead on depending on the signal from the Bollinger bands, traders should try looking for reassurance from other supportive indicators or use the support indicators or the support and resistance lines.
A pullback is something like an uptrend which actually helps in buying opportunity it happens when the main trend focuses on validating itself. The middle band incline upwards and the price trades in the area between the middle band and the upper band, proves it to be a sign of an uptrend. In this case, traders expect for a bounce off of the middle band to start long positions. Litecoin’s (LTC) chart presents the initiation of an uptrend in mid-February 2019 as the middle band went up and the price traded between the middle band and the upper band. Soon after these traders try to buy the rebound off the middle band and manage to keep the loss right under the swing low.
Solano (SOL) went down from the top upper band on Sep. 1, 2020, and broke below the middle band on Sep. 3, 2020. After this took place the price mostly remained inside the lower band, which was rejected on Oct. 2, 2020. This established the downtrend and gave a chance to traders to short on Oct 13, 2020 as soon as the downtrend continued.