✔️ Information reviewed and updated in November 2023 by Eduardo López
Over the years, the cryptocurrency market has become very popular with investors. It is essential that before entering this market, you know the trading indicators such as Bollinger bands, which are a support to obtain a certain type of statistical advantage in an operation.
Bollinger bands are technical analysis indicators, which serve to identify whether an asset is being traded outside its usual levels. Read on to learn more about this indicator.
➡Definition of the Bollinger bands indicator✨
Bollinger bands were created by John Bollinger, in order to analyze price patterns. It is made up of three lines that most frequently overlap the price of securities.
They compose strong areas of resistance and support when the market is not trending, and when the distance between the two lines decreases after having risen, the trend ends.
In addition, They help identify the range in which an asset operates by drawing a frame of reference to establish whether the asset's prices are high or low.
➡What are Bollinger bands for? ✨
This indicator helps to identify periods of low volatility in established market environments. Investors often look for these consolidation periods and wait to find another trading opportunity.
The upper and lower Bollinger bands make a channel type environment for the price, and with this they are expected to engulf price movements all the time.or. Both the upper and lower bands provide a range for price dispersion, as they are a measure of volatility.
If the channel gets narrower, or the closer the bands are, the less volatility that can be discovered in the security relative to today. On the other hand, the wider the separation between the bands, the greater the volatility that is perceived.
In addition, bands are used to help identify price trend reversal in the form of double tops and bottoms, to provide indications before those produced from conventional chart patterns.
➡How are they obtained? ✨
Bollinger bands are calculated by adding and subtracting a multiple of the standard deviation of a moving average., which shows an indication of market volatility and support and resistance levels.
The lines are drawn according to the following:
- The center line is a simple moving average with period n, where 20 is a common value.
- The upper band is plotted at "x" standard deviations above the center line, where 2 is a common value.
- The lower band is plotted at "x" standard deviations below the center line, where 2 is a common value.
➡How are Bollinger bands interpreted? ✨
As mentioned earlier, Bollinger bands adjust based on market volatility. More than 90% of the quotes are within the margins delimited by the bands, waiting for them to carry out a normal distribution.