I will keep this short and to the point.
Bollinger Bands simply add and substract a standard deviation calculation. Bollinger Bands consist of a center line and two price channels above and below. The center line is an exponential moving average.
How it is calculated:
- Middle Band = 20-day simple moving average
- Upper Band = 20-day SMA + (20-day standard deviation of price x2)
- Lower Band = 20-day SMA - (20-day standard deviation of price x2)
The 5 Main signals in the bollinger bands strategy are based on “Approaching Price Action”
- Bullish Expansion
- Bearish Expansion
- Bullish Move Up
- Bearish Move Down
Approaching price action based on both bands. You always look at both bands to get clues of what is going to happen next.
We will be using ICON/ETH trading pair to show the different signals.
The bands constrict when there is decrease in volatility. Unless the average daily range decreases, they will not constrict anymore. It is important to look at what the bands will do next in order to decide if you want to enter a new position or exit. (long/short)
Price is going to walk along the upper band. What is critical for Bullish Expansion is that the lower band is expanding in the opposite direction. Out of the constriction phase when the price follows the upper band heads up and the lower band goes down, this is an ideal entry for a long position.
The sharper the turning of the bands the more volatile the move.
This is just the opposite, with the price walking along the lower band. This is the indication that the price will go down. How much it will go down depends on what timeframe you are looking at.
Bullish Move Up
Here we have a bullish move up. This is a good example why it is critical to look at both bands. When the upper and lower band move up together. This is still a bullish move up, however we do not have the expansion we would like to see. Even though the move up might still take place, it is not as strong of a signal as the bullish expansion.
Bearish Move Down
We have had quite a bit of these in the last few months.
This is similar to the Bullish move down. Since both bands are going down there won’t be any strong price movement until there is an expansion or constriction of the bands.
Hope you liked this short introduction to bollinger bands. I try and keep these small guides simple so that everyone can understand without too much technical jargon.