The article is about Bollinger Bands, an popular indicator at the online trading platform Pocket Option. It can be used in many ways: from determining the general mood of the market to generating a signal to open a transaction in time.
What are the Bollinger Bands?
Bollinger Bands are a technical analysis tool, a type of trading band or envelope. As an indicator, it is designed to provide traders with information regarding price volatility.
Bollinger Bands was introduced in 1987 for stock and commodity exchanges. Later, the FOREX and the electronic contract market successfully adopted the tool. Millions of traders around the world use it for their trading strategies.
How do Bollinger Bands look?
Three lines compose a Bollinger Band Indicator: simple moving average line is in the middle between an upper and lower band.
As a technical analysis tool, it represents a set of lines plotted two standard deviations away from a simple moving average of the price. For example, Bollinger Bands can bracket the 20-day SMA of the stock with an upper and lower band along with the daily movements of the stock’s price. When the markets become more volatile the bands widen; during less volatile periods, the bands – contract. The traders like Bollinger Bands for its dynamism and use it to identify tops and bottoms or to determine the strength of the trend.
How to understand Bollinger Bands?
Most technical analysis programs come with Bollinger Bands preset to the 20-bar SMA (Simple Moving Average) and 2 SDs. It will show a central tendency point where the price should return after it swings higher or lower. Standard deviation predicts how far a swing should carry based on current volatility, which is updated with each price bar. Top and bottom bands visualize these hidden levels, which are relative to the moving average chosen for the indicator. The 20-bar works fine in most cases, so there is no need to data-mine for the perfect input.
Traders can modify the settings in their platform Pocket Option account or use the predetermined settings.
How to use Bollinger Bands in trading?
The primary goal of Bollinger Bands is to indicate and predict market trends. The interpretation is self-explanatory: upward lines mean uptrend and downward lines mean downtrend. There are many several basic patterns: flower, box, staircase, climax, etc. Bollinger Bands show their greatest power when price rises into the top band or descends into the bottom band. The shifting relationships between price, bandwidth and band-angle generate an assortment of patterns that emit unique short-term price predictions. Generally speaking, expect bands to hold back price when they remain horizontal into a cross or slope against price direction. These are called rising or falling box patterns.
The Bollinger Band analysis works extremely well when applied to two-time frames at once. For example, focus on relatively rare strikes at top, center and bottom weekly bands, using those levels for buy or sell signals when daily bands line up in similar patterns.
The chart below demonstrates when the situation when an upward trend is replaced by a downward trend. Even when the price goes the channel, it invariably bounces back. It is one of the main rules for effective strategies based on Bollinger bands.
The top band turning higher in response to rising price or the bottom band turning lower in response to declining price indicates that resistance is moving away, allowing the developing trend to extend higher or lower. These emit flower patterns, evoking the image of flower petals opening to the energy of sunlight. Avoid market noise if you are trading on lower time frames.
Conclusion: Bollinger Bands indicator at Pocket Option can help finding impulsive waves and patterns during corrective waves. We do not recommended to build your trading strategy solely on Bollinger Bands as you will get many losing trades.
You can benefit from Bollinger Bands by organizing price-band relationships in multiple time frames into repeating patterns that predict specific short-term price behavior. Traders also should adjust their SMA and standard deviation assumptions accordingly and monitor them.
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