Bollinger Band Analysis & Bollinger Trading Signals
Developed by John Bollinger
Bollinger Band are formed by 3 lines. Middle line is a Moving Average - 20 period Simple MA.
The bands are then drawn at a distance away from the moving average These are the bands which form the lower and upper lines.
The distance where the bands are drawn is determined by another indicator referred to as the standard deviations. Standard deviation is a gauge of volatility in the btcusd market or that of bitcoin crypto.
Since the btcusd market volatility keeps on changing, the standard deviations will keep changing, & since Bollinger bands are drawn using the standard deviation the distance of the bands will keep on adjusting themselves to the btcusd market conditions.
When the btcusd markets become more volatile, the bands widen & they contract during less volatile periods.
The 3 Bands are designed and intended to enclose/encompass majority of a bitcoin price action. Middle band forms the basis for the market trend, commonly a 20-periods simple moving average.
This band also serves as the base for the upper & lower bands. Upper band's & lower band's distance from the middle-band is determined by volatility. Upper band is drawn at +2 standard deviations above middle bollinger band while lower bollinger band is drawn at -2 standard deviations below middle bollinger band.
BTCUSD Analysis & Generating Signals
- Bands provide a relative definition of high & low
- Used to identify periods of high & low volatility
- Used to identify periods when bitcoin prices are at the extreme regions
the Squeeze
The Bollinger bands tighten as market volatility reduces, this identifies periods of consolidation. Sharp bitcoin price breakouts tend to occur and happen after the bands tighten.
Consolidation Pattern
the Bulge
If bitcoin prices break through the upper or lower band move outside the bands a continuation of the current bitcoin trend is expected.
Reversal Signals
Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the market trend
The Head Fake - Bitcoin Whipsaw
Traders should be on look out for false break outs known as whipsaws or head fakes.
Bitcoin Price often breaks-out in one direction immediately following the Squeeze setup causing a lot traders to think the break out will continue in that direction, only to quickly reverse & make the true, more significant breakout in the opposite direction.
Traders acting quickly on the initial breakout commonly get caught on the wrong side of the bitcoin price action, while those traders expecting a 'false breakout' can quickly closeout their original position and enter a trade in direction of the reversal. It is always good to combine Bollinger bands with other confirmation Indicators.
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