Daily traders use Bollinger Bands® as a technical indicator to show how close they are to a graphical reading of volatility around a financial instrument. The level of volatility around the price action of a financial instrument determines the level of volatility. In front of the board, the 21-day moving average (preferred time) is surrounded by an upper and lower Bollinger Band®. Over-buying (broadband) and unsold (narrowband) serve as technical indicators of market conditions.
How do you read Bollinger Bands®?
With those “tight” Bollinger Bands® applied to price action when looking at financial instrument chart software, a significant upward or downward movement may occur soon. However, if the chart of financial instruments has “broad” bands in price action, this may indicate an important move that will not happen in the near future. Narrow and broad, they can also be used as technical indicators against low and high volatility potential, in that current price action is used to predict a different movement in the future market.
That being said, the best conditions for using the indicator are periods of low volatility, with little fluctuation in prices. The more time they spend in a low volatility environment, the more they will tighten around the price action of the financial instrument. When tightened more than usual, the bands may indicate an increase in future volatility.
How can Bollinger Bands® be used?
When looking to trade Bollinger Bands® online for the day, don’t be in a hurry to make decisions if price action violates the upper or lower band, as this is not always an indicator of an immediate market movement. However, although most price action moves within the indicator, a breach of an external band is a rare occurrence, but cannot be trusted as a buy / sell signal. In addition, although widely used, Bollinger Bands® must be used in conjunction with two or more other technical indicators, such as Relative Strength Index (RSI) and MACD.
It is important to note that before trading based on the signal derived from the Bollinger Bands® and two other indicators, it is recommended to take a back-test of historical market trends with all these indicators. Contrary to the historical market trends you are studying behind these indicators will explain how your strategy would work in the historical conditions of the market.