Bollinger Bands consist of three lines - upper, middle, and bottom line - which is used to view the price movements within a specified period. This technique was developed by using the moving average with a standard two-line trading.
Basic Concepts
Bollinger Bands invented by John Bollinger in the early 80's and has become one of the technical analysis that is widely used by individual traders and market analysts. Bollinger Bands consist of three lines - upper, middle, and bottom line - which is used to view the price movements within a specified period. This technique was developed by using the moving average with a standard two-line trading. In the calculations, the Bollinger Bands do not use the percentage calculations like moving averages in general, but through the addition and distribution of standard deviation calculations.
Bollinger Bands
What does it mean that? Standard deviation is a mathematical formula that measures volatility, showing how the price can fluctuate around the 'true value'. Almost all price movement can be ascertained to move between two lines Bollinger.
Bollinger Bands consist of a central line and two-channel line rates, one above and one below the center line. Center line is an exponential moving average, could also use a simple moving average and channel lines are the standard deviation of the price. Channel line prices will move in accordance with widespread and narrow price movements that occur. Diameter is used as the basis for calculating the top line and bottom line.
Formulas Bollinger Bands
To menghituing Bollinger, usually 20 periods will be used as a default, but this figure could be adjusted to the desires and our goals.
Bollinger Band = Middle Line exponential / 20 Period Simple Moving Average
Top Line Bollinger Bollinger Band = Middle Line + (2 * Standard Deviation 20 Periods)
Bottom line Bollinger Band = Middle Bollinger Line - (2 * Standard Deviation 20 Periods)
Two important things gained from the Bollinger Band is the range of (BandWidth), relative size of the distance between the lines, and% b, the size of which the last price position compared to the line of Bollinger.
BandWidth = (Line Upper Bollinger - Bollinger Bottom Line) / Central Line Bollinger
% B = (Last Price - Lower Bollinger Line) / (Line Upper Bollinger - Bollinger Bottom Line)
Overbought and oversold
Prices may move in a trend for a certain period even though there is volatility in it. To see the trends better, many traders use moving averages as a filter volatility of price movements. In this way, traders can gather information about how to market movements, such as, after a sharp rise or decline, prices may be consolidating, moving within a short range and repeatedly moved around the moving average line. To monitor the behavior of prices like this with a better price can be used channel, which is designed to encompass the activities of price movements around the trend.
In the Bollinger Band, the line, describes the region 'overbought', while the bottom line illustrates the region 'oversold'. Most market analysts and traders use Bollinger Bands are combined with other technical analysis to provide a better picture than the current price movement.
Overbought and Oversold
When using Bollinger Bands, top line and bottom line is usually a target price movements. When the price away from the bottom and upwards through the moving average line with a period of 20, which is also the center line of the Bollinger Band, the line above will usually be a target of further price movements. In a strong uptrend, prices usually move between the lines above the center line, and in a strong down trend, the price will usually move between the center line and bottom line. If the price past the center line, upward or downward, usually identified with the existence of a trend change of direction.
Simple Strategies
Indeed, many traders and market analysts use the Bollinger Bands are combined with other technical analysis, but from Bollinger Bands alone can produce a simple strategy that only uses top line and bottom line to make trading decisions.
The strategy was to create a position when there is penetration or the price at the top or bottom line. Creating the position of buying after prices penetrate below the line where the price is considered to be in oversold condition. Usually, when the bottom line has been penetrated by the price because of the huge selling, prices will reverse direction and away from the bottom line closer to the center line. Likewise with the other hand, when penetrated by a line above and then create the position of the selling price, the price will usually turn up and approachrd menajuhi line diameter. This is the main scenario of a simple strategy which resulted from Bolliner dapt Band and try to profit from it.
Bollinger Bands Strategies
However, this strategy requires confirmation of the closing price (closing price) that are beyond the top line and bottom line of the Bollinger Band. If confirmation does not appear is not advisable to open a position.
Remain cautious
As you know, that every strategy has its own weaknesses, and this one is no exception. In the following example will be shown the limitations of this simple strategy and what will happen when something goes not according to what we planned.
When the strategy does not run properly, bottom and top line continues to be penetrated and prices continue to move beyond the line of the upper and lower Bollinger. Unfortunately the price is not reversed quickly, and this may impact on the number of significant losses on existing positions. In the longer term, this simple strategy is often true, but most traders will not be resilient to price movements that occur before the price finally turned.
Remain cautious
The best strategy to protect us from the failure of the Bollinger band is by placing stop-loss order at a certain level. And keep in mind that the 'market timing' has played a large role if we are trading with Bollinger Bands.
Basic Rules
Here are some basic rules in the use of Bollinger Bands which can serve as a good starting point:
Bollinger Bands provide a relative definition of high and low.
Relative definition can be used to compare the price movement and the movement of indicators that will generate trading decisions.
Corresponding indicator can be obtained from the momentum, volume, sentiment, open interest, inter-market data, and others.
Volatility and trend have been taken into account in the formation of Bollinger Bands, so their use in confirmation of the price movement is not recommended.
Indicators used for confirmation try not to interact with each other. Two indicators of the same category do not increase confirmation. Avoid kolinearitas.
Bollinger Bands can also be used to see a pattern like a double top, double bottom, and the change of momentum.
Prices can move beyond the upper or lower Bollinger Band.
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