Being very helpful in currency as well as financial market trends, Bollinger bands let you predict trending patterns with greater accuracy, enabling you to deal with trend reversals with less worry, and decide trading time with a good extent of certainty.
Bollinger Bands: What are they exactly?
Bollinger bands are named as such because John Bollinger was the developer. These bands are precisely volatility symbols drawn around simple moving averages. With the help of standard price deviation over a certain period as moving averages, Bollinger bands can be calculated by plotting the same below and above the moving average. Moving averages are known for their use in predicting underlying trends, and with Bollinger bands, volatility is combined with the whole process in order to come to a strong set of signals. With such bands, lower and upper band distance is assessed to be volatility, and when prices deviate from long term average, the bands show fluctuating patterns.
The real reason why Bollinger bands help
In trading, it is very common to witness short term price hikes, and during those times, the outer band volatility extent lets you understand how volatile the market conditions are at any given instant. Bollinger brands gracefully reflect how trader psychology plays an equally important role as supply-demand backdrop.
Usefulness of Bollinger Bands: What is it all about?
These bands are mostly helpful in 3 major areas:
1. Breakout spot and new trend embrace
Markets have a history of moving toward low volatility as well as high volatility interchangeably, and that is why, when market volatility decreases, Bollinger bands narrow down, which gives any smart trader a warning that high volatility is pretty likely to occur very soon. Moreover, when any indication of breakout is derived from these bands, traders can put themselves in low risk positions by trying to adjust their strategy with what is about to come.
2. Greater possibility of right timing
Long term trends, at times, tend to last for years. However, it is always wise to balance risk and reward. In the world of trading, entry timing matters a lot. That is where Bollinger bands can be extremely useful, encouraging your entry during the right moments. Such accuracy of prediction is possible with the help of momentum indicators such as stochastic.
3. Spotting reversing trend patterns
The space between upper and lower band predicts volatility primarily, however, traders can use the same information to gauze upcoming price trends and plan when to time entry. For instance, after price seems to get close to the top of a band, price is likely to revert toward moving average soon. Also, when bottom of a band seems to be near price, currency is highly likely to be oversold, and traders may profit from buying at this point.
Warning!
There is no doubt that Bollinger bands are helpful to a great extent, however, using such bands alone is not a great idea. You need to combine any band signal with other indicators, because relying on a single indicator is always risky. Mostly, these bands are great for basic chart making. And of course, when it comes to filtering out unreliable signals, stochastic happens to be great with timing.
