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Bollinger Bands Indicator
Bollinger Bands are a technical analysis indicator developed introduced by John Bollinger in the 1980's.
They are used by traders to gauge whether the market is volatile or not. When there's some volatility, the bands expand, and when there isn't they contract, and come closer together. Another such tool that helps to show price volatility is the ATR (Average True Range), and you can read about it here.
Please take a moment to watch this short introductory video on Bollinger Bands.
interpreting bollinger bands
Bollinger Bands consist of an EMA (Exponential Moving Average) and two trading bands above and below it. The image below clearly demonstrates the different periods of volatility. The first circled area is a volatile market, whilst the one on the right is a calm one.
As a trader, it's important to know that whenever the market remains calm for an extended period of time, it will awaken sooner or later. It will become volatile once again, and the Bollinger Bands are good at helping you identify such moments. When it's calm, the majority of traders tend to shy away from placing trades. They wait until the market is volatile again.
During periods of low volatility, in a downtrend, the price will tend to remain between the lower band and the EMA. Similarly, during a bullish movement, the price is usually found between the EMA and the upper band. See below. Remember, during low volatility, the bands are close together.
Now, let's look at some of the features of the Bollinger Bands, starting with the 'Bounce'.
Bollinger Bounce
The price of an asset usually tends to bounce between the top and bottom bands, oscillating about the EMA (centre line). This is where the name 'Bollinger Bounce' comes from.
If you look within the brackets, you can clearly see the price 'bouncing' between the upper and lower bands. This is because the Bollinger Bands act as a resistance level and dynamic support. Notice that this is taking place at a time when the volatility is low. What about when it's volatile (trending) ?
Bollinger Squeeze
As the name suggests, this is when the bands are very close together. As previously mentioned, when this happens, it usually means that a trend is about to form. If the candles break above the band at the top, the trend is most likely going to continue in that direction.
As you can see above, in the blue box, we have the Bollinger Squeeze. Then in the yellow circle we can see the green candlestick breaking the upper band. What happens after that ? It continues to trend in a bullish pattern.
As with all indicators, it can be more accurate when used in conjunction with others. One such indicator is one that is used to confirm a trend. This is none other than the Awesome Oscillator.
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