Who and when developed the indicator
Today, BB is one of the most popular indicators for technical analysis. The author of the Bollinger Bands is the American analyst John Bollinger, president and founder of Bollinger Capital Management.
BB concept developed in 1980 based on the work of Trade Lanes by Wilfrid Led and Chester Keltner. The book “Bollinger on Bollinger Bands”, published in 2001, brought the indicator the greatest popularity.
Bollinger has also developed two additional indicators: “%b” and “BandWidth”. %b shows the value where exactly the BB is located relative to the SMA and is used to build patterns and determine trends. BandWidth indicates the distance between the upper and lower Bollinger bands.
How Bollinger Bands Work
Bollinger Bands construct a “channel” on the chart that accompanies the asset’s price curve and consists of three lines: middle, upper and lower. The basis for building BB is the central band, which is simple moving average (SMA). Two other lines are denoted by positive and negative standard deviations.
As standard parameters for the BB indicator, which is recommended by its author, take a period of 20 and a deviation with a value of 2. For example, if we consider the daily chart of Bitcoin, the parameters will look like a 20-SMA with a spread of 2.
It should be noted that the higher the period, the lower the sensitivity of the indicator. In practice, with an accurate BB setting, as Bollinger himself noted, the asset price curve should lie between the lower and upper lines of the indicator 90% of the time.
How to Use Bollinger Bands in Trading
Bollinger has compiled a list of short rules that serve as the basis for understanding BB. The complete list of rules is available on the site Bollinger CapitalManagement. Here are a few:
- Touching the price of the bands by itself is not a signal to buy or sell an asset, and the indicator itself only complements other trading tools.
- Closing the price above the boundaries of the bands more often means the continuation of the price movement in the direction of a breakout of the level.
Bollinger Bands can be used for many assets, including cryptocurrencies. This indicator can be used on any time frame including five minute, temporary, daily, weekly and monthly. The time period selected must have sufficient volatility for the use of BB to make sense.
Benefits and Risks of Using Bollinger Bands
Bollinger bands allow you to determine the average volatility of a specific asset. Using BB will help determine the potential maximum or minimum price of an asset based on standard data for the past time frame. Author also noted, that the indicator is suitable for determining price patterns, including “double top” or “double bottom”. Along with this there are dashes. Here are a few:
- Low volatility. Using Bollinger Bands requires enough volatility to form a channel. Lack of activity renders the use of BB useless.
- Business risks. Using Bollinger Bands without additional tools and indicators in the process of making trading decisions is associated with risks. The BB indicator by itself does not give signals to buy or sell an asset.
- Channel violation. A price breakout through the Bollinger Bands most often means that the trend will continue in the direction of the breakout. Setting the price above the channel boundaries does not give buy or sell signals.
- Use of “identical” indicators. Bollinger bands should not be used with indicators based on moving averages. For example, you should not use EMA with Bollinger Bands. According to Bollinger rules, indicators should not be directly related.
- Periods too long. Using BB for too long periods of time. Setting the indicator above the value of 20 periods makes the indicator less sensitive to changes. This creates unwanted “stability” for analysis.
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