Bollinger Bands Basics for Newbies
if you are a newbie in the world of trading, whether we’re talking about forex, the stock market, or anything in between, you absolutely need to know about indicators. Indicators are extremely valuable to Larry courses that used in technical analysis in trading, and they provide you with a variety of information in terms of price data. Indicators are designed to help you determine exactly what the trend, momentum, volatility, and volume of a specific security or asset is like, with the main point being to help you place profitable trades. Now, one of the best indicators that you need to be familiar with is the Bollinger bands indicator.
When it comes down to it the Bollinger bands indicator is one of the absolute best volatility indicators out there, and it can provide you with a whole lot of useful information in terms of placing trades. However, with that being said, Bollinger bands are a bit complicated to understand and to read, which is why we are here today. We are here to provide you with a crash course or a rough introduction to Bollinger bands indicators. We’re going to tell you exactly what this Bollinger bands indicator is, what it does, how to read it, and what its advantages and disadvantages are. We’ve also included a very useful tutorial video courtesy of none other than Andrew himself, where he explains what the four best Bollinger bands trading strategies are. Let’s get right to it and help you make money using this awesome Bollinger bands indicator.
What is the Bollinger Bands Indicator?
First off, Bollinger bands is a specific type of volatility indicator, Which was invented by man named John Bollinger in the 1980s. He developed a very special technique that utilized a moving average along with two trading bands above and below that moving average line. Unlike a normal moving average that has a percentage factored into it, the Bollinger band simply adds an subtracts a standard deviation calculation.
One thing to keep in mind here is that a standard deviation is a mathematical formula that measures volatility, and it shows how the price of a currency or stock varies from its true value. By measuring the volatility of the price of a specific asset, the Bollinger bands indicator has the ability to adjust itself to market conditions. This is one of the reasons why it’s so popular and useful among traders, because it provides you with mostly all of the price data that you need between those two bands in order to make profitable trades.
The Three Components of BB
What is also very important for you to know about these Bollinger bands is that there are three specific parts to this indicator. You have to be able to read all three of these lines in order to gather the information that you need to place profitable trades.
The first component of the Bollinger band is the simple moving average, which is usually of an intermediate length. This is a very simple 20 day moving average and 20 days is generally the default setting. This moving average can be used to measure trends and to calculate the two other elements of this indicator.
The second component of the Bollinger bands indicator is the upper band, which is a standard deviation above the simple moving average, and it is generally 2 standard deviations. The third and final component is the lower band, and this is a standard deviation below the simple moving average, and it’s usually set at two standard deviations as the default.
What Bollinger Bands Tell You
Bollinger bands are designed to provide you with information about price movement in terms of volatility. The general consensus is that when price moves closer to the upper band, then the market is overbought, and the lower the price move to the lower band, the more oversold that same market is. The main point to remember with Bollinger bands is that the further away the bands are from one another the higher the volatility, in the closer the bands are to each other lower the volatility.
Pros and Cons
Just like with any other indicator out there, the Bollinger bands indicator does have various pros and cons that need to be considered.
- One of the biggest benefits that you get with the boulder brands indicator is that it is excellent for identifying emerging and new trends that happen at the end of old trends. It’s definitely a great multi-purpose indicator.
- If you need to see volatility in a market, then this is probably one of the best indicators that you could possibly use.
- This technical indicator is also extremely popular because it is so easy to use and it can be applied to virtually any chart in order to identify trends, momentum, and volatility.
- The biggest drawback with this indicator is that it follows recent price movements, and is therefore a lagging indicator, and the issue is that it might not provide you with accurate signals until price movement is already underway.
- The other downside is that you can’t really use these Bollinger bands by themselves, and it is best when they are used with other technical analysis tools.
Trading With Bollinger Bands – Tips & Strategies
Right now, we want to finish things off by providing you with some of the best tips and strategies for trading with the Bollinger bands indicator.
- Keep in mind that when the bands tighten together in a time of low volatility, then there is a much higher probability of a strong price movement in either direction. This could start a trending move.
- You also need to observe false signals in the opposite directions, and these might reverse right before a trend starts.
- Keep in mind that when the bands are separated by a large amount, an existing trend may close due to rising volatility.
- Also remember that the price can go beyond a band for long periods when there are strong trends.
- Remember that prices can also be within the bands. For example the price could bounce off of the lower band and then pass above the moving average, with the upper band then being the profits target.
- If the price moves out of the bands, but then moves in back inside of the band right away, then the suggested strength of a trend is negated.
In terms of the best trading strategies that you can use with the Bollinger bands, we definitely recommend taking a closer look at both of the videos that we have included here. Within both of these videos, Andrew discusses what the very best Bollinger bands trading strategies are for a variety of situations.
Trading with Bollinger Bands – Final Thoughts
Now that we have provided you with a crash course on trading with the Bollinger bands indicator, you should have a much easier time generating consistent profits on a daily basis.
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