This guide will cover how to use Bollinger Bands and the most common ways to use them for crypto-trading. Like all of our guides, please remember that this is not financial or investment advice. You should always consult with your certified financial planner. Let us know if you like this guide, and what youโd like to see in the future!
Disclosure: No content in this article should be taken as financial advice. Investing can be risky, so it is recommended that you consult with your accounting, legal, and tax advisors before engaging in any kind of transaction.
What Are Bollinger Bands?
Bollinger Bands can be an extremely valuable tool in the crypto-trading world for spotting short-term price trends in crypto. This indicator is used to measure and visualize price volatility within a market and automatically adjust itself based on market conditions. Price volatility is simply how much the price of an asset fluctuates. Many traders use this tool to help see if a market may be overbought, or oversold and when may be a good time to buy and sell. Letโs set up a Bollinger Band and then talk about how to decipher the visualization.
Setting Up the Bollinger Band
To set this up, weโll use the Trading View website. You can choose whatever currency you want to set up your band, but weโll use Bitcoin as our example.
- In the upper left-hand corner, choose BTCUSD. This will show the Bitcoin to USD chart.
- Next, click on the โIndicatorsโ tab and type in โBollinger Bands.โ Click on the indicator.
- You now have your simple Bollinger Band set up โ how easy was that?
How Do We Use Them For Crypto-Trading?
The Anatomy of a Bollinger Band: Letโs look at the Bollinger Band that we just set up. The singular line that you see going through the Bollinger Band is the 20-day Simple Moving Average (I changed the color to pink so you can see it better, yours may be a default of red). We spoke about Simple Moving Averages in a previous post. The outer bands that you see are the deviations from the Simple Moving Average. These bands showcase volatility within a market. For example, the wider that you see the bands in some areas, means the more volatility there was at that time. When you see narrower bands, this means there was less volatility.
Example 1: Typically, when you see a period of high volatility (wide bands) that narrows down into a period of lower volatility (narrow bands), this can be a sign that a big breakout is about to happen. A few examples of this are highlighted below. This is a sign that the price has stabilized enough to where buyers will be entering the market. Now, this breakout may occur in a positive or negative direction so it can be useful using other indicators as well in order to better time the market. Keep in mind, while Bollinger Bands are a great tool, there is NEVER a guarantee when using this technical analysis. So, use it to enable you, but donโt rely your decisions solely off of this one strategy.
Example 2: Bollinger Bands can also be good to see if a cryptocurrency has been overbought, or oversold. When you look at the area within your bands, the majority of the price action will remain within these bands. If you look at the chart you have open now, you may see that there are periods where the price is outside of the bands (extremely high points, or extremely low points). If you see a trend of days where pricing is higher than the bands, youโre most likely due for a correction and the price will come down. During this time, it could be a good idea to sell. If you see a trend of days where the pricing is lower than the bands, again, you may be in for an upcoming correction, and it could be a good idea to buy. See some examples circled below. But as stated before โ thereโs no absolute guarantee! We use these trading indicators to get a better grasp on whatโs occurring, and what may occur in these highly-volatile crypto-markets.
Thatโs all for now folks! Let us know what you think of the Bollinger Bands โ Happy Investing!
