Lesson 4: Bollinger Bands - The Volatility IndicatorHello Friends, and welcome to Lesson #4. I will be going over Bollinger Bands today which is also a few of widely used indicators. I had also got some requests to do a lesson on Bollinger Bands, so here it is. Lets get straight to the point on this lesson.
We will be going over the below topics in this lesson:
What are Bollinger Bands?
How do we use the indicator?
* W Patterns
* M Patterns
* Some basic Stuff
These are some interesting topics about Bollinger Bands, so make sure you read and understand it very carefully, so you can apply these while trading.
WHAT ARE BOLLINGER BANDS?
Refer to the above main chart for getting an understanding.
Basically, Bollinger bands are a volatility indicators. The upper and lower bands are around a Simple Moving Average (SMA) which for this tutorial we are using the default 20 day SMA. I usually use the default anyways when I use it for trading. So coming back to the definition, the distance between the upper and lower band tells us how much volatile a coin currently is. In simple terms, if the coin is not moving much, and is steady at a certain price, we call that a SQUEEZE, which means that at that time, the upper and lower bands will be tightly close together. Similarly, when a coin moves up or down suddenly, or has been going up or down for a while, the distance between the Upper and Lower Bands will be more depending upon the volatility. As you can see in the chart above, when TRX is steady at a certain price level, the bands are squeezed together, and as soon as the price starts going up, we see that the bands widen.
Got this part? Pretty Straightforward correct? Just to summarize that, when the coin is increasing in volatility, the bands widen, and when a coin is decreasing in volatility, they are narrow.
So this was basically an overview of the indicator, now note that some people do use Bollinger Bands alone as an indicator when trading , but I would recommend using MACD, and RSI along with it, so you can have more confirmations, and your trades can be successful. Also, the more longer the timeframe, you will see more accuracy in this indicator. But that doesn't mean you can't use them on shorter time frames.
Now you must be thinking, when is the interesting part going to start of how to actually use these in trading? What are some of the signals to look for? Lets get to that right away.
HOW DO WE USE THE INDICATOR:
Keep this in mind, that the upper bands and the lower bands, both act as a support to the price action, and the 20 day SMA which I like to call the Center Band, also acts as a stronger support/resistance. This can be clearly seen on the chart above.
Now we will talk about the W pattern and the M - Pattern. This might be confusing for some of you, but now do not just rely on the Bollinger bands with these patterns. Make sure you have another indicator confirmation. Bollinger Bands is not meant to be used by itself as an indicator.
Continue reading below......
