2.1. bollinger bands trading
2.2. bollinger bands bitcoin
2.3. bollinger bands scalping
Trading on Cryptocurrency Bitcoin/Etherium with Bollinger Bands
A Bollinger Band®, developed by famous technical trader John Bollinger, is plotted two standard deviations away from a simple moving average.
Bollinger Bands® are a highly popular technical analysis technique. Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. John Bollinger has a set of 22 rules to follow when using the bands as a trading system.
Bollinger bands help assess how strongly an asset is falling (downtrend), and when the asset is potentially strengthening (to the upside) or reversing. This information can then be used to help make trading decisions. Here are three guidelines for using Bollinger Bands in a downtrend.
When the price is in a strong downtrend it will typically touch or run along the lower band during impulse waves lower. When it fails to do that it shows the downtrend may be losing momentum. Even during a downtrend prices may rally for periods of time--called pullbacks. During a downtrend, if the price is moving strongly lower then pullback highs will typically occur near or below the moving average (middle) line. The pullback doesn't have to stall out near the middle line, but it does show selling strength if it does. When the price is in a strong downtrend it shouldn't touch the upper band. If it does that's a warning sign for a reversal.
Using the guidelines for trends discussed above, here are the summary guidelines for spotting reversals.
If the price is in an uptrend, and continually hitting the upper band (and not the lower band), when the price hits the lower band it could signal that a reversal has commenced. If the price rallies again, it likely will not be able to reach the upper band or the recent price high.
If the price is in downtrend and continually hitting the lower band (and not the upper band), when the price hits the upper band it could signal that a reversal has commenced. If the price declines again, it likely will not be able to reach the lower band or the recent price low.
Issues With Bollinger Bands
With established guidelines on how to use the Bollinger Bands, find settings for the indicator that allow the application of the guidelines to a particular asset being day traded. Alter the settings so that when one looks at historical charts they can see that the Bollinger Bands would have helped. If the Bollinger Bands do not help (as discussed above) then change the settings or do not use the bands to trade that particular asset. Ideal Bollinger Bands setting vary from market to market, and may even need to be altered over time even when trading the same instrument.
Once the indicator is set up and seemingly working well, there will still be periods where the indicator has a tendency to produce false signals. During low volatility times, the bands will contract, especially if the price is moving sideways. During such times the price may bounce off both the upper and lower band. In this case, it is not necessarily a reversal signal, though. The narrow bands are just closer to the price and thus likely to be touched.
Bollinger Bands are not a perfect indicator; they are a tool. They do not produce reliable information all the time, and it is up to the trader to apply band settings that work (most of the time) for the asset being traded.
The most important concept in ANY form of trading is to keep losses small and have bigger winning trades than your losses on average. But with scalping Bollinger bands, due to its higher winning percentage when done correctly, a trader can get away with winning trades the same size as losses. So if the stops are 10 pips, one can take 10 pip wins. The markets during the UK, Europe, and US session move so much in most currencies that finding a 10 pip move in 10 – 60 minutes is often not too difficult.
A quick math lesson about standard deviation. Standard deviation is simply a statistical measurement of the amount of data within normal bounds. Is that confusing? Well, here is the simplified version: the outer bands of Bollinger bands are standard deviations measurements. So when the price hits these bands, it means the price is at an unusual extreme. What would you think the market would do if it hit unusual extremes? Probability tells you that the price should return back to normal eventually, so that means price should turn around. Simply put, when the price hits the outer bands of Bollinger bands, a scalper should look for the market to turn around.
Use candlesticks, stochastic, or support/resistance
So you know that the market should turn around, but how do you determine when it will turn around? You need another indication, and candlesticks, stochastic, or support and resistance are great options. Look for an engulfing candlestick pattern where the market moves back toward the center of the Bollinger bands. Look for the stochastic to change direction and move back to the center. When using support and resistance — are the Bollinger bands right around major support and resistance? If so, you have a beautiful scalping opportunity.
Watch for breakouts
Bollinger Bands are awesome at showing volatility. You will definitely notice when the bands get really close together. This means that the market has grown quiet. The good news is that calm usually precedes the storm. This means that the market is setting up to really start moving. When you see Bollinger bands really close together, it is time for scalping breakouts.
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