One of the most actively used technical indicators among crypto traders are Bollinger Bands, which are used to measure volatility and look for entry and exit points.
In this article, you’ll learn about the important things to know about crypto trading strategies with Bollinger bands.
What are Bollinger Bands?
Created in the 1980’s by John Bollinger, an American asset manager, and technical analyst, the Bollinger Bands are defined as a set of three lines plotted over the asset prices:
The middle line is a Simple Moving Average (SMA) of N periods.
The upper band is the value of the middle line plus k times the standard deviation (SD) of the price.
The lower band is the value of the middle line minus K times the standard deviation (SD) of the price.
Therefore, mathematically, the upper and lower bands can be calculated as:
SMA ± k x SD
By default, Bollinger bands parameters are typically set to N=20 and k=2 in most of the platforms but, of course, you can modify them and experiment with different values. By the way, k doesn’t have to be necessarily an integer or greater than 1, and the simple moving average can be replaced by an exponential one. When it comes to trading, don’t forget to be creative.
Bollinger Bands are a popular technical analysis tool used in cryptocurrency trading to identify potential entry and exit points. They consist of a simple moving average (SMA) in the middle, with two standard deviation bands plotted above and below the SMA.
Common trading strategies using Bollinger Bands
- Bollinger Squeeze: When the bands contract towards the SMA, it indicates low volatility. Traders anticipate a breakout and enter positions when the price breaks above or below the bands.
- Bollinger Breakout: When the price breaks above the upper band, it suggests a bullish breakout, and traders may consider buying. Conversely, a breakout below the lower band may indicate a bearish trend, prompting traders to sell.
- Bollinger Reversal: After a strong trend, if the price touches or crosses the opposite band, it could signal a reversal. Traders may enter positions in the direction of the new trend.
- Bollinger Bounce: When the price touches the lower band, it could indicate an oversold condition, and traders may anticipate a bounce back towards the upper band. Similarly, when the price hits the upper band, it could be considered overbought, suggesting a potential pullback.
- Bollinger Bands with RSI: Combining Bollinger Bands with the Relative Strength Index (RSI) can provide additional confirmation. For example, if the price touches the upper band and the RSI is overbought, it could strengthen the case for a potential reversal.
Closing Thoughts
It’s important to note that while Bollinger Bands can help identify potential trading opportunities, they should be used in conjunction with other technical indicators and fundamental analysis for a more comprehensive trading strategy. Additionally, traders should always practice proper risk management to protect their capital.