# A Beginner's Guide to Understanding Bollinger Bands.

A Beginner's Guide to Understanding Bollinger Bands.

If I say that Bollinger Bands are such an indicator that tells how high or low the price of a cryptocurrency can go in the coming time, then you will believe it. You have to believe because the very purpose of Bollinger Bands is to tell the price range of crypto in the future (in a given time frame).

The Billinger Bands were first created by John Bollinger in 1980. Earlier, people did not trust it because they thought that it was not static, but now its measures are being taken for all trading, even for cryptocurrency.

The dynamic nature of the Bollinger Bands indicator makes it a favorite among people. The best thing about this is that whether you are a new or experienced trader, you can easily understand it. Today we will understand this same Bollinger Bands chart and how to use it in your crypto trading to earn maximum profit.

Before starting, let me tell you that even though this tool is easy to understand, it is an advanced tool, and to use it, you must have at least a basic understanding of crypto trading.

# What are the Bollinger bands?

According to Bollinger, "They are curves drawn in and around the price structure, usually consisting of a moving average (the middle band), an upper band, and a lower band that answer the question as to whether prices are high or low on a relative basis."

If I talk in simple language, then it is a chart with three lines, out of which two lines, upper and lower, are the main lines. These two lines of Bollinger Bands tell what the price range of a cryptocurrency could be in the coming time frame.

This name for Bollinger bands was used unknowingly. When John Bollinger discovered this indicator, it became very famous, so he went on a radio show to explain how it worked. There, he explained it well, but the matter got worse when the show host asked him the name of the line appearing in the indicator. John was not ready for this, and he was repeatedly ignoring this question, but the host was also repeatedly asking what the name of this line was. Then, when John felt that he would now have to answer, he added his last name and called this indicator Bollinger bands. Since then it is called Bollinger Bands.

## Structure of Bollinger bands.

It looks like a tunnel that surrounds the price candle on all sides. There are three lines in this: the upper one is called the "upper band," the lower one is called the "lower band," and the middle one is called the "median band" (or simple moving average). This indicator does not have its own indication color or time break, but you can set your own time range.

A time range of at least 20 days and +/- 2 standard deviations is considered good. If you want to use your own Bollinger Band settings, then you will have to reduce or increase the standard deviation along with the time frame, but it can be very risky.

1. The upper band is the line that is two standard deviations above the asset's price over a given period's simple moving average (SMA). Based on past price data, it represents the top end of the asset's typical price range.
2. The lower band is the line that is two standard deviations away from the SMA of the asset's price for the given time frame. Based on past price data, it represents the lower end of the asset's typical price range.
3. The middle band is nothing more than the SMA of the asset's price for the given time frame. It represents the asset's average price during the given time period.

## Understanding Bollinger Bands.

John has given a total of 22 rules for using the Bollinger Bands strategy. Bands only indicate buy and sell momentum, volume, and sentiment, not price. The farther the upper and lower bands are from the middle bands, the greater the risk of price volatility.

If the price moves above the upper band or close to it, then that would be the best time to sell any crypto. On the contrary, if the price moves to the lower bands, then it is a good time to buy any crypto.

But one thing is worth noting here: John Bollinger says that if the price crosses the upper and lower bands, that is not a buy or sell signal because the price can go up and down. In simple words, it gives overbought and oversold signals.

If the upper and lower bands approach the middle bands of the contraction, the price is less prone to volatility. This situation is called a squeeze. After this situation, there is a big chance that the price will go up in the future, which is a good signal for crypto trading.

## Calculating Bollinger Bands.

Calculating it is a mathematical process. For this, you should have the previous price data (upper, lower, and close price) of the cryptocurrency you want to trade, which is quite a time-consuming process. But for this, you can take advantage of Coinmarketcap.com. You just have to click on the coin and then go to the historical data; from here, you can extract the price data according to your time range. If you know how to use Excel, then you can easily calculate Bollinger Bands using this data.

You can also use the basic formula to calculate Bollinger bands.

• Calculate the moving average (MA) of the asset's price over a specified period: MA = (Sum of Prices Over the Period) / (Number of Root of Sum)
• Calculate the standard deviation (SD) of the asset's price over the same period: SD = square root [(Sum of squared differences from the MA) / (Number of periods)]
• Calculate the upper and lower bands by adding or subtracting two standard deviations from the MA.

Upper Band = MA + (2 * SD)

Lower Band = MA - (2 * SD)

The "2" in this formula represents the number of standard deviations to use for the upper and lower bands, which is a commonly used value in Bollinger Bands analysis. However, traders can adjust this value to fit their individual trading strategies and risk tolerance.

## Getting profit from the Bollinger band chart.

According to the chart given below, I will tell you how you can make money using it. Here I will also use the stochastic indicator along with Bollinger Bands so that we can get an idea of the current behavior of the trader. As I said earlier, the closer the upper and lower bands are, the more the price of the coming season will be filtered to go up. Seeing this, with the help of the chart, we bought Ethereum, whose price is \$1549 and the upper Bollinger Bands is \$1566, while the stochastic is at 16%.

We target to sell the coin only when the price moves above the upper bands, and for this, we look at the stochastic chart. After about 10 hours, the Bollinger Bands start spreading, and the price has also moved above the upper bands while the stochastic chart has reached its peak point, which is the right time to sell the coin.

We have reached our target price. Now at this time, Ethereum's price is \$1628 and the upper Bollinger Bands price is \$1630, while Stochastic is at 98% (80% is good). If we subtract \$1628 (the selling price) from \$1549 (the buying price), we get \$79 in profit.

Remember, this experiment is for a few hours, and not every situation is the same. And never use Bollinger bands alone.

## Limitation of Bollinger bands.

Unlike other indicators, it does not give any fixed signal; it only shows the momentum range, which is very risky. Apart from this, it cannot be used alone; John told that it gives good results when used with other indicators like bandwidth, an exponential moving average, and RSI. Also, the use of a 20-day SMA and 2 standard deviations is a bit arbitrary and may not work for everyone in every situation. Traders should adjust their SMA and standard deviation assumptions accordingly and monitor them.

## Conclusion - Bollinger bands.

Bollinger Bands tell the overall price volatility, so traders identify potential buying or selling opportunities when the price moves outside of limits. To get a good result, you should use it in combination with other technical analysis tools to create a comprehensive trading strategy, such as RSI, stochastic, %B, etc. John said that like every other tool, you cannot completely trust it, but traders can use Bollinger Bands to gain a better understanding of an asset's price movements and potentially improve their trading results.