Day-trading tips # 1 – Bollinger Bands

Image taken from Binance.com

Author: Nikolay Dimitrov
Date: 23th of July 2018

Do not make investment decisions based on this article – read the disclaimer before you proceed.

 

Bollinger Bands were created in the 1980s by John Bollinger as a method for traders to identify extreme deviations from a moving average line. There are three lines in the Bollinger Bands. The middle one serves as the center. Using two standard deviations above it to form the upper band and two standard deviations below it to form the lower band, statistically, 95% of the price action should be contained within the bands.

When the price goes above the upper band, that means that we are entering overbought territory, counter wise when we go below the lower band we go into oversold territory. Those are called breakouts.

When there is not much volatility the bands are very near to each other and this is called the squeeze. Usually after a squeeze comes a time of volatility and vice versa.

Some traders buy when the price touches the lower band and sell towards the middle or the top line, to buy again when the price is lower. This indicator is good to be used with other indicators showing overbought or oversold conditions which we will cover in another article.

Quite often when we have a breakout the price action continues in the same direction so a stop loss order should always be in place and you should also look at volume, market sentiment and events that might guide the price up before deciding when and if to sell.

 

 

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