Bollinger Bands Strategy (Advanced Analysis)

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Bollinger Bands

Bollinger bands are lines/bands which are plotted two standard deviations away from a simple moving average and which adjust themselves to the market conditions.

Bollinger band might be referred to as volatility bands which are placed above and below a moving average. The volatility is based upon standard deviation, which changes accordingly to volatility. Which means that, the more volatility increases or decreases, the more the band will change its form. The band automatically widens when volatility increases, giving a larger space for the candle to move and it contracts if ever volatility decreases. Below is the image of a Bollinger bands analysis on a chart:

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It would be good to note that the Bollinger bands consist of not only 2, but 3 bands, where one of the bands is in the middle and also uses a simple moving average curve. As we can see in the diagram above, the exterior band widens as the candles moves bullishly. On the chart, the bullish candles were moving so fast, that it pushed outside the upper band. However, just before that, we can see that the candles were trading in a tight channel, thus, the bands contracted around the candles, showing lack of volatility.

However, moves that breaks above the upper band are not signals to trade upon, it can be referred to as tags, which indicates a strengthening market. On the opposite, a move that breaks below the lower band indicates a weakness in the market.