Bollinger
Definition
Bollinger Bands are composed of concepts of moving averages and standard deviation, forming a channel with three lines: upper band, middle band, and lower band. The middle band is a moving average (MA) of prices over a specified period. The distance between the upper and lower bands is determined by the standard deviation.
Bollinger Bands measure the volatility of asset prices relative to previous trades. The bands expand when the market becomes more volatile and contract during periods of lower volatility.
Components and Calculation of Bollinger Bands
Middle Band: User-defined moving average over a specific time period.
Middle Band = MA
Upper Band: Value derived by adding n times the standard deviation to the middle band.
Upper Band = Middle Band + Std Deviation * n
Here, n is a multiplier used to adjust the width of the Bollinger Bands.
Lower Band: Value derived by subtracting n times the standard deviation from the middle band. Lower Band = Middle Band - Std Deviation * n
Parameters of Bollinger Bands
Bollinger Period: Number of candlesticks used to calculate Bollinger Bands.
Bollinger Bandwidth: Used to multiply with Bollinger Bands to scale the width of the upper and lower bands.
Moving Average: Supports selection of different types of moving averages, currently offering six types including SMA, EMA, WMA, DEMA, TEMA, and TRIMA. Each type of MA smoothes price data to varying degrees.
Price Source: Determines which data of each candlestick will be used for calculation, including: Low price, High price, Close price, (High price + Low price)/2, (High price + Low price + Close price)/3, (Open price + High price + Low price + Close price)/4, (High price + Low price + Close price)/Volume.
How to Use Bollinger Bands?
Open Long: when the price breaks above the upper Bollinger Band.
Open Short: when the price breaks below the lower Bollinger Band.
Advantages and Disadvantages of Bollinger Bands
Advantages:
Effective in Volatile Markets: Bollinger Bands excel in identifying price patterns, assessing trend strength, pinpointing optimal entry times, and dynamically seeking potential market opportunities in highly volatile markets.
Disadvantages:
Lagging Indicator: Bollinger Bands rely on past price data, which can result in delayed signals.
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