Bollinger Bands: What are they?

There are many different views concerning technical analysis for cryptocurrency trading and investing. Along with those views, come a host of chart indicators, each with their own stated advantages. Each trader has their own bias on which indicators work for them.

One indicator sometimes referenced in the crypto space are the Bollinger Bands.

What Are They?

Bollinger Bands (also abbreviated to B.B.) are a charting indicator invented by financial analyst John Bollinger. They comprise three specific lines on the price chart of any given asset. The lines are overlayed on top of price candlesticks, moving and reacting based on the asset’s price action.

According to his website, Bollinger explained he developed his Bollinger Bands based on researching former financial market players and their previous methods. These include Wilfrid Ledoux’s Dow Jones Industrial Average high low curves, and Chester Keltner’s 10-Day Moving Average trading system.

Other indicators like Keltner BandsDonchain bands, and percentage bands are similar but do not account for certain aspects of the market. “Bollinger Bands use standard deviation to adapt to changing market conditions”, Bollinger stated. His bands account for volatility in the market.

Volatility is important to consider when trading crypto. Volatility is basically the state of price movement in the market. High volatility means more dramatic price swings.

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The above image is an hourly bitcoin chart for the Bitmex exchange. Each candlestick represents one hour of price movement. The two blue lines and single red line are the Bollinger Bands.

The specific parameters for the lines remain unchanged, even after more than 35 years, Bollinger said.

“20 periods for the moving average with the bands set at plus and minus two standard deviations of the same data used for the average”.

How The Bands Work

As mentioned above, Bollinger Bands are three lines around price action. The middle line is a 20-period moving average. Based on a chart with hourly candlesticks, the 20-period moving average takes into account the past twenty hours of price, concluding an average price for that time frame.

The two outer bands lie two standard deviations above and below the middle line. According to Bollinger, the upper and lower bands “answer the question as to whether prices are high or low on a relative basis.”

Bollinger continued explaining. He said, “Bollinger Bands work best when the middle band is chosen to reflect the intermediate-term trend, so that trend information is combined with relative price level data.”

When volatility increases, the outer bands widen in opposite directions, proportionate to the amount of volatility.

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When volatility is low, the bands tighten. Band tightening can indicate an upcoming breakout with greater price volatility. Although “narrowing bands do not provide any directional clues,” stated in an article on Bollinger Band squeezes.

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Bollinger Bands in Crypto

Cheds Trading (also known by his Twitter handle, @BigCheds) is a crypto trader who commonly uses Bollinger Bands in his strategy.

Chonis Trading (@BigChonis on Twitter), and Josh Rager (@Josh_Rager on Twitter) also referenced Bollinger Bands in their price analysis, seen in the figures below.

Trading crypto (or any asset for that matter) is a tough game. What may work for one person may not work for another. Bollinger Bands are just one tool out of many that traders and investors can investigate for their personal use.

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