Is Bitcoin overbought or oversold? Use Bollinger Bands to find out!


Buying and selling is neither a precise science nor artwork. It’s a combination of each. There are scores of publicly obtainable indicators and every claims to be the very best. Nevertheless, none of them are good or designed for use in isolation.

One of many extra widespread indicators broadly utilized by a number of merchants is Bollinger Bands, an indicator that can be utilized to identify value peaks, lows, and alternatives for shorting throughout exhausted rallies and shopping for throughout sharp pullbacks.

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Let’s be taught three easy strategies to make use of this indicator in buying and selling.

What are Bollinger Bands?

John Bollinger created and copyrighted the Bollinger Bands within the Nineteen Eighties. The indicator consists of a center band, which is an easy transferring common whose default is ready at 20-periods and two outer bands set at two commonplace deviations beneath and above the center band.

BTC/USDT every day chart. Supply: TradingView

Its most simple use is to establish whether or not the worth is excessive or low on a relative foundation. If the worth is above the higher band, the asset is perceived to be overbought. However, if the worth dips beneath the decrease band, the coin is believed to be oversold.

Nevertheless, many merchants make the error of assuming that the asset value will drop when it reaches the higher band, or {that a} rally will begin when the worth hits the decrease band.

This typically occurs solely when the worth is caught in a spread. As with all different indicator, assumptions can simply result in enormous losses in a trending market so in search of confluence from a variety of metrics continues to be a very good pratice to make use of.

Let’s have a look at a couple of methods merchants use the Bollinger Bands.

Bollinger Bands can spot volatility squeezes

Based on John Bollinger, property swap between phases of low volatility and excessive volatility. Due to this fact, after intervals of low volatility, merchants could count on the volatility to shoot up, which may lead to trending strikes.

XRP/USDT every day chart. Supply: TradingView

The above chart reveals how XRP’s volatility dropped sharply between mid-September to mid-November 2020, marked as an ellipse on the chart. After about two months of this low unstable part, the volatility shot up and the XRP/USDT pair provided a wonderful buying and selling alternative.

BNB/USDT every day chart. Supply: TradingView

Within the above instance, Binance Coin (BNB) was in a downtrend and the volatility tightened between the end-September to mid-November 2018, marked as an ellipse on the chart. Right here, the volatility expanded to the draw back and the BNB/USDT pair resumed its downtrend.

A volatility squeeze doesn’t predict the path of the subsequent breakout. Typically, the market makers nudge the worth above the higher band and beneath the decrease band, trapping the novice merchants. Due to this fact, merchants could keep away from pre-empting the path and watch for the worth to both break above the resistance or beneath the help of the vary earlier than establishing a place.

ETC/USDT every day chart. Supply: TradingView

The above chart reveals how the overly keen bulls and bears can turn out to be trapped. On Oct. 22, 2020, the bulls pushed the worth above the higher band however couldn’t clear the resistance at $5.77. After a couple of days on Nov. 3, 2020, the worth pulled beneath the decrease band however didn’t break the help at $4.58.

Ethereum Basic (ETC) broke above $5.77 on Nov. 18, 2020, nevertheless it was not an ideal commerce as the worth didn’t begin a robust uptrend. The market makers went attempting to find patrons’ stops and likewise tried to entice the bears with the sharp drop on Dec. 23, 2020.

Nevertheless, the worth shortly climbed again above the decrease band on Dec. 24, 2020, and the ETC/USDT pair quickly began a robust up-move.

Due to this fact, as an alternative of relying solely on the sign from the Bollinger Bands, merchants must also search for affirmation from different supportive indicators or use the help and resistance traces.

Bollinger Bands can sign when to purchase throughout a pullback

A pullback in an uptrend is often a shopping for alternative as the principle development tends to reassert itself. When the center band slopes up and the worth trades within the space between the center band and the higher band, it’s a signal of an uptrend. On this state of affairs, merchants could watch for the bounce off the center band to provoke lengthy positions.

LTC/USDT every day chart. Supply: TradingView

Litecoin’s (LTC) chart reveals the beginning of an uptrend in mid-February 2019 as the center band turned up and the worth traded between the center band and the higher band. After that occurs, merchants could try to purchase the rebound off the center band and preserve the stop-loss slightly below the swing low.

There have been 5 attainable entry alternatives for a conservative dealer. 4 of them turned out to be winners however one would have hit the stops. This reveals how no technique is ideal, therefore a stop-loss ought to at all times be used to restrict the chance.

SOL/USDT every day chart. Supply: TradingView

Solana (SOL) turned down from above the higher band on Sep. 1, 2020, and broke beneath the center band on Sep. 3, 2020. Since then, the worth largely remained contained in the decrease band, which turned down on Oct. 2, 2020. That confirmed the downtrend and gave a possibility to merchants to brief on Oct. 13, 2020, because the downtrend resumed, following a transfer to the center band.

Two Bollinger Bands can be utilized to trace sturdy uptrends

Probably the most worthwhile methods to commerce is to purchase and maintain throughout sturdy uptrends. Nevertheless, that is simpler mentioned than accomplished as a result of a number of merchants promote too early out of concern and others preserve ready for the dip.

That is the place the double Bollinger Bands can turn out to be useful. Its use has been popularized by Kathy Lien, the managing director of FX Technique for BK Asset Administration.

To assemble the setup, merchants use the default worth for the primary Bollinger Bands. For the second Bollinger Bands, preserve the worth of the transferring averages the identical at 20-day SMA however scale back the worth of the usual deviation of the outer bands to 1.

BTC/USDT every day chart. Supply: TradingView

As proven above, in an uptrend, the goal is to purchase when the worth trades between the higher band of the primary and second Bollinger Bands.

There are a number of entry alternatives attainable and a dealer would watch for the worth to shut between the higher bands for 3 successive days earlier than shopping for as a result of this may help to keep away from surprising whipsaws.

Merchants can preserve the preliminary stop-loss beneath the center band however shortly path it larger to scale back the chance and shield earnings. One of many attainable exit methods could be to promote on a detailed beneath the higher band of the Bollinger Bands with one commonplace deviation.

The chart above reveals how the technique is used. Merchants could have entered on Dec. 19, 2020, and remained within the commerce till the stops hit on Jan. 11, 2020. One other shopping for alternative arose on Feb. 7, which lastly hit the stops on Feb. 23.

This technique ought to be prevented when the worth is oscillating in a spread and to enhance the chances, merchants may solely open new positions when the worth breaks out of a stiff overhead resistance.

Key takeaways

The Bollinger Bands is usually a good software to help merchants in figuring out a development early by recognizing the volatility squeeze, which is often adopted by an growth in volatility and a trending part.

Even when a dealer missed shopping for early, the Bollinger Bands can be utilized to affix the development throughout pullbacks with a low-risk entry alternative.

The indicator also can turn out to be useful for buying and selling a robust trending part the place corrections are shallow.

There are a lot of alternative ways to make use of the Bollinger Bands and this text simply offered a couple of pointers that merchants can discover.

The views and opinions expressed listed below are solely these of the creator and don’t essentially mirror the views of Each funding and buying and selling transfer includes danger, it is best to conduct your individual analysis when making a call.