Bollinger Bands Bitcoin Trading Analysis & Bollinger Trading Signals
Created by John Bollinger
Bollinger bands are formed by 3 lines. Middle line is a Moving Average - 20 period Simple Moving Average.
The bands are then drawn at a distance away from the moving average These are the bands that form the lower and upper lines.
The distance where the bands are drawn is determined by another indicator called the standard deviations. Standard deviation is a measure of volatility in the btcusd trading market or that of bitcoin crypto.
Since the btcusd trading market volatility keeps on changing, the standard deviation will keep varying, and since Bollinger bands are drawn using the standard deviation the distance of the bands will keep on adjusting themselves to the btcusd trading market conditions.
When the btcusd trading markets become more volatile, the bands widen and they contract during less volatile periods.
The 3 Bands are designed to encompass the majority of a bitcoin price action. Middle band forms the basis for the trend, typically a 20-periods simple moving average.
This band also serves as the base for the upper and lower bands. Upper band's and lower band's distance from the middle band is determined by volatility. Upper band is drawn at +2 standard deviationss above the middle band while the lower band is drawn at -2 standard deviationss below the middle band.
BTCUSD Analysis & Generating Trading Signals
- Bands provide a relative definition of high & low
- Used to identify periods of high and low volatility
- Used to identify periods when bitcoin prices are at extreme regions
the Squeeze
The bands tighten as volatility lessens, this identifies periods of consolidation. Sharp bitcoin price break-outs tend to occur after the bands tighten.
Consolidation Pattern
the Bulge
If bitcoin trading prices break through the upper or lower band move outside the bands a continuation of the current bitcoin trend is expected.
Reversal Trading Signals
Bottoms and tops made outside the bands followed by bottoms & tops made inside the bands call for reversals in the trend
The Head Fake - Bitcoin Trading Whipsaw
Traders should be on look out for false break outs known as whipsaws or head fakes.
Bitcoin Price often breaks-out in one direction immediately following the Squeeze causing many traders to think the break out will continue in that direction, only to quickly reverse and make the true, more significant breakout in the opposite direction.
Traders acting quickly on the initial breakout often get caught on the wrong side of the bitcoin price action, while those traders expecting a 'false breakout' can quickly closeout their original position and enter a trade in direction of the reversal. It is always good to combine Bollinger bands with other confirmation Indicators.