Bollinger Bands : Easy to understand
Bollinger Bands
Hello there,
Welcome to the other important lesson of understanding indicators. Today, we are going to learn a tricky but important indicator by the mean of use. So, let's give it a go.
Points:
⦁ Introduction
⦁ How to apply?
⦁ Formula
⦁ How to use/How does it work?
⦁ Compatibility with other indicators
⦁ Pros and Cons
Introduction:
It is a technical analysis tool which is introduced by John Bollinger. It gives us the best opportunity to trade in short term assets. It is also known for its accuracy. It has a set of trendlines that are plotted in two standard deviations - 'positive and negative' which are away from SMA - Simple Moving Averages and it can be adjusted according to the user.
How to apply:
1. Open your Demat account.
2. Select the indicator termed 'Bollinger Band'
3. Fill in the required details
Period - 20, Standard Deviation - 2
Field - Close, Moving Average Type - Simple
⦁ You can set colours according to you.
Formula:
- BOLU - MA(TP,n)+ m×σ(TP,n)
- BOLD - MA(TP,n)- m×σ(TP,n)
BOLU - Upper Bollinger Band
BOLD - Lower Bollinger Band
TP - Typical Price = (High+Low+Close)/3
n - Number of days in period = 20 (in default)
M - Number of standard deviation = 2(in default)
How to use/How does it work?
When you will use it, you will get to know that it seems like a band. There is an upper line as well as a lower line present in it. Moreover, it has a middle line too but we do not talk about it because it seems not necessary to us. At normal, the price varies between both these lines only.
In these two lines, the upper line works as a resistance and the lower one works as a support. Whenever the price crosses the upper line, the market then gives us a signal of overbought. from here, a golden opportunity in the whole market is generated. When the candle crosses the upper line and the next candle after it makes a close under its low.
It works for us as a confirmation, we will now wait for the lower line to be crossed, and till then we will remain in the market. It is a bearish signal.
As same, when the market is close to or crossed the lower line then it also comes as a golden opportunity.
Confirmation :
When the next candle gives its close upper than the high of the previous one, we will immediately enter the market. It is a bullish signal and will wait till the candle doesn't reach the upper line.
Compatibility with other indicators:
We can apply this indicator to the other indicators as well. They can be RSI, Pivot Points, Supertrend etc. by which we can assure our decision with double-triple confirmation with high accuracy.
Pros and Cons:
Pros:
- Easy to use.
- Easy to apply.
- High Accuracy.
Cons:
- It is not 100% accurate.
- Chart more than the duration of 15 minutes does not work accurately.
- Trading with the use of only this indicator is over-risk. You may take help from other indicators too.