How do I set up Bollinger Bands, and how does it help in trading?
Bollinger bands is a tool used by traders to get such important market data as:
- volatility level
- trend continuation or trend reversal
- consolidation periods
- potential target levels
- potential maximum and minimum levels, among others.
Bollinger bands are formed by two lines moving along an MA. They form a so-called volatility channel. A wide channel signals a high volatility level, and a narrow channel signals a low volatility level.
How to draw Bollinger Bands
Bollinger bands are drawn based on the following formula
Upper Bollinger Band = MA (TP, n) + m * q [TP,n]
Lower Bollinger Band = MA (TP, n) + m * q [TP,n]
Where:
MA is a Moving Average, normally, it is taken for 20 days.
TP - typical price, it is calculated = (high + low + close) / 3
n = number of days in smoothing period, normally 20
m = number of standard deviations, normally 2
q[TP,n] = Standard deviation over last n periods of TP
How to use Bollinger Bands
If the channel is wide, the volatility is high, and it opens many trading opportunities. If the channel is narrow, the volatility is low, and thus, the situation is good for exiting trades.
The closer the price moves to the upper band, the more overbought the market. And on the contrary, the closer the price moves to the lower band, the more oversold the market. By the lower breakout, you receive a signal to open a long position. By the upper breakout, you receive a signal to open a short position.
How to set up Bollinger Bands
To set up signals based on Bollinger bands movement, open the Alerts tab.
- Pick the exchange.
- Select the coin pair for which you want to receive alerts.
- In the Select indicator field, pick BB - Bollinger Bands.
- Click on the Set Alert button.
That’s it. Now, you will receive alerts as soon as a signal comes.
If you want to change the alert settings, click on the Open Settings button in front of the alert, and implement the required changes.
To delete the alert, click the Delete Signal button in front of the alert you want to delete.