Bollinger bands and lines

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Bollinger bands and lines

Financial trading with any technical tool requires the trading participant to use specialized tools to predict movements in the liquidity quotations of assets. Traders mainly use technical analysis services, which are characterized by informativeness, speed of calculations and generation of forecasts, as well as the accuracy of trading signals. The list of these tools includes a fairly wide range of resources – from specialized techniques for identifying market patterns and graphical tools to indicators of automatic forecasting. Each successful investor seeks to get the widest possible toolkit that will expand the trader’s potential and capabilities while working in the market. Today, we will consider one of the most popular and technically efficient indicators, which maximizes its effectiveness in binary trading – the Bollinger Waves.

This service of indicator analysis was developed several decades ago, and during the practical use it showed itself with the most effective and effective side. Despite the fact that the indicator was originally created for work in the stock and currency markets, as well as for working with standard trade contracts, it is very effective as a service for generating forecasts for binary options, as evidenced by the many optional strategies built on its basis and the responses of traders , which use the indicator in daily trading.

What is the Bollinger Indicator

So, the indicator of the Bollinger line or strip (the differences in the name of the instrument do not matter, but are a reflection of the traders’ preferences in tool identification) is one of the many forms of applying such a trend indicator as the moving average. To build the layout of the Bollinger Bands tool, the trade asset graph uses three medium-range lines with a standard deviation of the calculation of the indicators. In the standard settings mode, the service is used with a build period of 20, that is, the sliders take into account the indicators of the twenty candles of quotations for calculating the movings on the graph and the standard deviation of 2. The latter is necessary to calculate the deviation of the price from the average values ​​for the period of market valuation. In the standard configuration, Bollinger waves have such a technical markup format, where the indicator lines have the following values:

• The upper bar of the instrument displays the maximum values ​​of quotations in the estimated period and the level of deviation from the average range of the asset value
• Average Moving is the standard moving average, which is calculated according to the specified period
• The lower band of the instrument identifies the minimums of quotations and the degree of price deviation from the level of average indicators

Technological acceptance of the use of means for identifying signals for option trading makes the Bollinger indicator a very effective tool for market analysis. Algorithm and format of the service makes the tool extremely informative and allows you to identify as many technical indicators as you need to predict the market. The main indicators of the evaluation are:

• Price levels of a possible reversal of quotations – minima and maxima. These indicators are identified by the indicator’s border removals. This mode of using the service is extremely effective in trading options and will allow you to achieve the highest performance in this segment of the market.
• Volatility of price movement – so we can clearly define not only the trend direction of the market, but also the strength of this movement. This indicator is identified by estimating the level of divergence of the indicator’s border removals relative to the instrument’s median. So, the stronger the lines are removed from the average indicator, the higher the level of volatility of quotations and, accordingly, the trend trend is stronger. Using the indicator of market volatility, it is possible to easily and effectively adjust trading indicators and obtain the most accurate trading signals

• Levels of fracture of medium and short-term trends. To make contracts on the market with longer expiration, use the standard trend reversal signal, which is identified as the breakdown of the indicator’s median in a particular direction. Taking into account the periodicity of the moving average, as well as the frame used to install the service, one can clearly calculate the expiration of contracts and apply the batch mode of trading with short-term rates

• Zone of consolidation of the market – to determine the flat or the level of price consolidation, it is enough to identify the horizontal mode of building the Bollinger channel with minimal volatility. Bollinger waves, thanks to their calculation algorithm, clearly respond to the minimum price movements, so they can correctly determine the market share when certain levels of asset value are reached. In addition to this Bollinger Consolidation Zone, it is possible to generate a highly productive signal for trading in the form of a breakdown of the zone at the time of increased market volatility.

• Technical zones oversold and overbought market. Given that the indicator with its boundary lines determines the highs and lows of the market, one can logically assume that the levels of the quotes chart that are located behind these lines are market zones in which the asset is overbought or oversold, which allows obtaining an additional mode of signal generation when the tool

A wide range of information provided by Bollinger Waves allows you to work on the service in several modes at once, which, by the way, complicates the clear identification of the resource as an indicator of a certain type.

What is the type of service?

In this issue there is an interesting situation – the fact is that many traders use the indicator to refer to quite different types. The first – work with Bollinger Bands as on oscillator services, the latter – use the resource as a channel indicator.
In principle, both options are quite effective. The fact is that the averages, even in the standard application, can clearly identify the channel boundaries in which the price is concluded in a certain period, while the same levels can be regarded as oversold and overbought zones, which undoubtedly refers the tool to oscillator indicators.

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Work in oscillator format

Bollinger waves in the calculation of indicators use, as we said above, the principle of constructing moving averages. At the same time, the root-mean-square shifts of removals that represent the boundaries of the channel identify the highs of the market. If the market were cyclical and, upon reaching certain indicators, simply changed the direction of the trend, then we could use the service only as a channel tool. But the market is not quite elastic and predictable, and here there are many moments of both volatile volatility and inertial movements of quotations. Therefore, we can often observe situations when quotes go beyond the boundaries of the Bollinger Canal. It is in this situation that the service can be viewed as an oscillator. The price out of the indicator indicates a too rapid rise or fall of the price relative to the average values, and this is an identifying indicator for determining the oversold or overbought market. Using the breakdown points of the price of the indicator channel’s boundaries as a signal for placing bids, you can get more than 80% of the resulting contracts in the options market.

Bollinger waves as a channel service

A more classic application of the indicator is the channel mode. In this case, traders use an informative set of signals, which is formed on the principle of trading from the levels of the trend of quotations. In this case, service removals are used as support levels for trend resistance, but not in a standard graphic format, which allows identifying only linear market extremes, and in the mode of building trend lines as dynamic levels of moving averages. This allows more accurate and at any time to identify the possible price range for the reversal of quotations. In addition, in the channel format, you can very productively determine not only short-term trend reversals or corrective movements, but also more global changes in the direction of the market. For these purposes, the indicator of the median line of the indicator or median is used. The main signal in this plan is a breakdown at the price of this level, which indicates a complete change in the market trend.

Strategies based on Bollinger Waves

Given the range of market indicators being evaluated, which uses the Bollinger Wave indicator to form the markup, as well as the information content and a wide range of signals generated by the instrument, this service is an independent highly effective trading strategy. In principle, we have provided the full set of standard signals of the Bollinger Wave strategy, which will allow binary traders to obtain rather high trading figures.
But the indicator, when working in a binary market is used by traders as a means for developing multi-indicator strategies. Often in such strategies, market participants add additional oscillators, such as MACD, RSI, Stochastic. This allows you to more clearly identify signals for trading short-term contracts and leads to increased trading efficiency. In addition, the service can be used in several settings, which allows you to create more efficient systems. For example, traders often use several services with changed parameters of the standard deviation of removals – in this mode the price channel is expanded and the signals in the form of a spread of quotations in the oversold / overbought zones are used as efficiently as possible:

This strategy is very effective when working on highly volatile trading assets at the time of the release of fundamental data.
In addition, you can use a strategy built on the simultaneous operation of two indicators of the Bollinger Wave, which build on the chart a channel with an average build range and a channel with a minimum period:

Thus, the highest accuracy of forecasts for binary contracts is achieved, which leads to an increase in the trading result.

Summary

So, we have provided you with a description of the algorithm for the operation of one of the most effective and popular in the trading environment of market forecasting tools. The indicator of the Bollinger Wave, thanks to its technically advanced algorithm of calculation and operation, makes it possible to formulate strategies of any complexity and efficiency. In addition, several signal generation modes offered by this service make it a universal tool for trading on any financial instrument and in absolutely all market situations. Using the principles and format of the market evaluation of this analysis tool, you can achieve the goals in the binary market for a minimum of time, which is the main attractive point of the indicator.

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

The Basics of Bollinger Bands®

In the 1980s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it.   Unlike a percentage calculation from a normal moving average, Bollinger Bands® simply add and subtract a standard deviation calculation.

Standard deviation is a mathematical formula that measures volatility, showing how the stock price can vary from its true value. By measuring price volatility, Bollinger Bands® adjust themselves to market conditions. This is what makes them so handy for traders; they can find almost all of the price data needed between the two bands.

Understanding a Bollinger Band®

Bollinger Bands® consist of a centerline and two price channels (bands) above and below it. The centerline is an exponential moving average; the price channels are the standard deviations of the stock being studied. The bands will expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction).

A stock may trade for long periods in a trend, albeit with some volatility from time to time. To better see the trend, traders use the moving average to filter the price action. This way, traders can gather important information about how the market is trading. For example, after a sharp rise or fall in the trend, the market may consolidate, trading in a narrow fashion and crisscrossing above and below the moving average. To better monitor this behavior, traders use the price channels, which encompass the trading activity around the trend.

We know that markets trade erratically on a daily basis even though they are still trading in an uptrend or downtrend. Technicians use moving averages with support and resistance lines to anticipate the price action of a stock.

Upper resistance and lower support lines are first drawn and then extrapolated to form channels within which the trader expects prices to be contained. Some traders draw straight lines connecting either tops or bottoms of prices to identify the upper or lower price extremes, respectively, and then add parallel lines to define the channel within which the prices should move. As long as prices do not move out of this channel, the trader can be reasonably confident that prices are moving as expected.

Day Trading With Bollinger Bands

Bollinger Bands are a technical indicator developed by John Bollinger. The indicator forms a channel around the price movements of an asset. The channels are based on standard deviations and a moving average. Bollinger bands can help you establish a trend’s direction, spot potential reversals and monitor volatility. All of this can help you make better trading decisions if you follow a few simple guidelines.

Bollinger Band Basics

Bollinger bands have three lines, an upper, middle and lower. The middle line is a moving average of prices; the parameters of the moving average are chosen by the trader. There is no magic moving average number, so the trader can set the moving average so it aligns with the techniques discussed below.

The upper and lower bands are drawn on either side of the moving average. The distance between the upper and lower band is determined by standard deviations. The trader determines how many standard deviations they want the indicator set at, although many use two standard deviations from the average.

No magic number exists here either. Choose a setting that aligns with the techniques below, for the asset being traded. The attached chart shows a one-minute crude oil futures chart with Bollinger Bands. Trendlines have been drawn to show the trend direction based on Bollinger Band guidelines discussed below.

Day Trading Uptrends with Bollinger Bands

Bollinger bands help assess how strongly an asset is rising (uptrend), and when the asset is potentially losing strength or reversing. This information can then be used to help make trading decisions. Here are three guidelines for using Bollinger Bands in an uptrend.

  • When the price is in a strong uptrend it will typically touch or run along the upper band during impulse waves higher. When it fails to do that it shows the uptrend may be losing momentum.
  • Even during an uptrend prices drop for periods of time, known as pullbacks. During an uptrend, if the price is moving strongly then pullback lows will typically occur near or above the moving average (middle) line. The pullback doesn’t have to stall out near the middle line, but it does show strength if it does.
  • When the price is in a strong uptrend it shouldn’t touch the lower band. If it does that’s a warning sign of a reversal.

Read the “Issues” section below for occasions when Bollinger Bands tend not to provide reliable information.

Day Trading Downtrends with Bollinger Bands

Bollinger bands help assess how strongly an asset is falling (downtrend), and when the asset is potentially strengthening (to the upside) or reversing. This information can then be used to help make trading decisions. These three guidelines, similar to uptrend guidelines, can help use Bollinger Bands in a downtrend.

  • When the price is in a strong downtrend it will typically touch or run along the lower band during impulse waves lower. When it fails to do that it shows the downtrend may be losing momentum.
  • Even during a downtrend, prices may rally for periods of time, called pullbacks. During a downtrend, if the price is moving strongly lower then pullback highs will typically occur near or below the moving average (middle) line. The pullback doesn’t have to stall out near the middle line, but it does show selling strength if it does.
  • When the price is in a strong downtrend it shouldn’t touch the upper band. If it does that’s a warning sign of a reversal.

Check the “Issues” section below for occasions when Bollinger Bands tend not to provide reliable information.

Spotting Trend Reversals with Bollinger Bands

Using the trend guidelines, here are the summary guidelines for spotting reversals.

  • If the price is in an uptrend, and continually hitting the upper band (and not the lower band), when the price hits the lower band it could signal that a reversal has commenced. If the price rallies again, it likely won’t be able to reach the upper band or the recent price high.
  • If the price is in a downtrend and continually hitting the lower band (and not the upper band), when the price hits the upper band it could signal that a reversal has commenced. If the price declines again, it likely won’t be able to reach the lower band or the recent price low.

Issues With Bollinger Bands

The first issue with Bollinger Bands is their limitation as just one indicator. John Bollinger recommends using them with two or three other un-correlated indicators, instead of seeing them as a stand-alone trading system.

With established guidelines on how to use the Bollinger Bands, find settings for the indicator that allow you to apply the guidelines to a particular asset you are day trading. Alter the settings so that when you look at historical charts you can see how the Bollinger Bands would have helped you.

If the Bollinger Bands don’t help you then change the settings or don’t use the bands to trade that particular asset. Ideal Bollinger Bands setting vary from market to market, and may even need to be altered over time even when trading the same instrument.

Once the indicator is set up and seemingly working well, the indicator may still have a tendency to produce false signals. During low volatility times, the bands will contract, especially if the price is moving sideways. During such times the price may bounce off both the upper and lower band. In this case, it isn’t necessarily a reversal signal, though. The narrow bands are just closer to the price and thus likely to be touched.

Bollinger Bands aren’t a perfect indicator; they are a tool. They don’t produce reliable information all the time, and it’s up to the trader to apply band settings that work most of the time for the asset being traded.

Final Word

The Bollinger Bands indicator is just a tool. It has flaws, and won’t produce reliable signals all the time. It can help you stay on the right side of trend and spot potential reversals, though. For that, you’ll need to set up the indicators so they align with the guidelines discussed above. Random or default setting on the indicator may not work well. Adjust the indicator and test it out with paper trades before using the indicator for live trades.

The guidelines above are not a trading strategy on their own. A trading strategy requires entry points, exit points, and risk management, which weren’t discussed in this article. Bollinger Bands can be combined with a trading strategy, though, such as the day trading stocks in two hours method.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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