Bollinger Bands, a technical analysis tool used to indicate where oversold and overbought levels are, can be useful when used in conjunction with other indicators or candlestick patterns. The three lines that comprise Bollinger Bands consist of the 20-day simple moving average in the center and two standard deviations above and below. When the price hits the upper band, it usually comes back down, and when it hits the lower band, it usually goes back up. It is not recommended to use Bollinger Bands on their own, rather in conjunction with other indicators or patterns to achieve a better trading outcome.
The Bollinger Bands: What Are They?
The Bollinger Bands is a popular technical analysis tool among traders. It is defined by a set of trend lines plotted two standard deviations positively and negatively away from a simple moving average of a cryptocurrency’s price. The indicator is used to determine overbought and oversold levels, which can be more visually noticeable on the charts.
How to Use Bollinger Bands?
To use the Bollinger Bands indicator, you can head to TradingView and type in “Bollinger Bands” under the indicator tab. The Bollinger Bands consist of three lines – the 20-day simple moving average in the middle, and two other lines representing two standard deviations plus and minus of that 20 moving average. Juggling these three lines can give traders a sense of where market trends may be heading.
The Downsides of Bollinger Bands
The Bollinger Bands indicator is not a perfect solution by itself. It is not wise to buy every time the price hits the bottom of the band or guessing when it hits the top band. It is recommended to use the Bollinger Bands in conjunction with other technical indicators or candlestick patterns.
The Engulfing Strategy
One popular trading strategy when using the Bollinger Bands is the Engulfing strategy, which involves spotting bearish or bullish engulfing candles at the top or bottom of a Bollinger Band. With this strategy, traders can set their stop loss below the high and take profit at the bottom of the Bollinger Band. Engulfing pattern trades can lead to great risk-to-reward ratios, yielding fantastic profits for traders.
While Bollinger Bands can provide valuable information to traders, using them in conjunction with other indicators or strategies can lead to better trading outcomes. The Engulfing strategy is just one example of how Bollinger Bands can be used in combination with other tools to help predict trends and make informed trades.