Interested in using a technical indicator that could help you produce strong returns? Bollinger Bands may be just what you need.
John Bollinger, who created this indicator, has emphasized how useful Bollinger Bands can be for bitcoin trading. As he wrote in his newsletter:
“Bitcoin is a terrific vehicle for Bollinger Band trading. That shouldn’t come as a surprise as we have long known that Bollinger Bands are well suited for forex in general, and Bitcoin is really nothing more than a specialized form of forex.”
Using this indicator, the technical analyst claims to have successfully predicted three pivotal events for bitcoin – one bottom and two tops.
How Do You Use Bollinger Bands?
Bollinger Bands are created by plotting bitcoin’s simple moving average (SMA) and then creating bands above and below that line, which are calculated using standard deviations above and below the SMA.
The period of time studied is articulated in the Bollinger Band itself, so a Bollinger Band 21 would be based on a 21-day time frame.
There are several ways you can use Bollinger Bands to your advantage.
Is Bitcoin Overbought Or Oversold?
For starters, you can use them to get a better sense of when bitcoin is either overbought or oversold. For the most part, bitcoin will fluctuate between the bands.
Should the digital currency’s price fall below the bands, that means it is breaking lower, and therefore could be oversold. In this case, you may decide that it is a good time to purchase bitcoin.
If bitcoin’s price rise above the upper band, this indicates that the currency has broken higher, and could be overbought. If bitcoin’s rally continues, you may want to hold and extend your gains.
However, should you conclude that bitcoin is indeed overbought, it may be a great time to sell.
Before you rely on Bollinger Bands to make any transactions, it can be quite helpful to use additional technical indicators for confirmation.
Another use case for Bollinger Bands is predicting volatility. Periods of low volatility frequently give way to periods of high volatility, and vice versa.
If bitcoin enters a time of high volatility, this represents trading opportunities. Likewise, if the digital currency’s volatility declines, this development means there will be fewer opportunities to turn a profit through trading.
Therefore, if the bands become very close, you can take this to mean that volatility will soon increase. Likewise, if these same bands move far apart, you can interpret that as meaning that volatility will soon decline.
Bollinger Bands can be quite helpful, but they are only one indicator. As a result, it will be far more effective if you use them in combination with other technical indicators. Bollinger himself has specifically recommended that traders combine Bollinger Bands with 2 or 3 other indicators that provide more direct market information. (See our articles on Bitcoin Technical Analysis and Bitcoin Technical Indicators.)
Want to learn more about other indicators you can use to evaluate bitcoin trades? For more tips, subscribe to Bitcoin Market Journal.