Bollinger Bands are one of the technical indicators that traders can use. It was developed by John Bollinger. It formulates a channel around the particular asset price movements. The channel formulates according to the moving average and the standard deviation.
This indicator helps traders to establish a trend direction, monitor volatility, and also spot potential reversal. In the end, following a simple guideline, Bollinger Bands can help traders make a better trading decision.
The Basic Knowledge of Bollinger Bands
In Bollinger Bands, you will find three lines, they are an upper, middle and lower line. The middle line represents the moving average of the asset’s price.
Traders have the ability to choose the parameters they want to use to decide the moving average. There are no special tips in deciding the parameters. Thus, traders only need to set the moving average to align with the techniques they want to use.
On the other hand, the upper and lower lines of the indicators are on both sides of the moving average. The distance between those two lines shows the standard deviations. Traders can set the number of standard deviation where they want the indicator set. Commonly, traders use two standard deviations from the average.
There is also no special number for the exit numbers. You just need to set the setting aligning the technique you use for the assets you are trading.
Precaution for the Use of Bollinger Bands
You have to remember that Bollinger Bands is just a tool. There are times when it shows its flaws and produces a not so reliable signal. Yet, it still has the ability to help you find the right side of a trend or spot the potential reversal.
But, remember, you have to always adjust the indicators as well as testing it out in a paper trade. Without that, the random and default setting will not gain profits.