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Bollinger Bands: Definition and Functions

If you have ever tried trading stocks or forex (foreign exchange), there are various indicators that you can use to optimize profits. One of the equipment that is quite popular among traders is Bollinger Bands or Bollinger bands. What exactly is a Bollinger band and how does it work?

Bollinger bands were first discovered by John Bollinger in the 1980s. These markers are made to help speculate the range of price movements. Traders use these markers to quote decisions when to buy and when to sell. To better understand it, follow this next explanation!

Bollinger Bands Interpretation

As a technical marker for trading, Bollinger bands are used to measure the volatility of a legacy and speculate where the price style will go. In addition to using style ideas, Bollinger bands are also used to determine the level of overbought or tired of buying and oversold or tired of selling. We can identify it when the market is ranging (sideways), the price will move between 2 bands (bands).

Bollinger bands have SMA (Simple Moving Average) which consists of 2 bands, each of which is located on the base line and the top line of the SMA. The bands located at the top are known as the Upper Bollinger Bands while the bands located at the bottom are known as the Lower Bollinger Bands.

The upper band number with this base band is measured by carrying out the decrease and accumulation of SMA numbers with a standard of regression. The digression standard itself measures volatility and is estimated as long as the cost movement is from the true value (the real number).

What is the Method of Trading Activities Using Bollinger Bands?

The initial stage in dividing Bollinger bands is to divide generally simple movements of traded stock or deposit securities. Usually the 20-day SMA is used. By using the general price movement for 20 days, you will get the closing price for the first 20 days which will be used as the initial point of information.

The next point of information is obtained by lowering the price very early, increasing the price on the 21st day after quoting the average. So it's next. Next, we will get the standard of regression from the price of the legacy. The regression standard is a generalized version of mathematical measurement and features that appear in statistics, economic accounting, and finance.

How is the illustration of using Bollinger Bands in trading?

The method that is very often used by traders with Bollinger bands is to open long positions when the price crosses the base band and quote sell positions when the price exceeds the upper band or bands. Unfortunately, this stage is not always successful.

There are times where a trader opens a sell or buy position when the price crosses the upper band and the base band but the price does not rebound (back up or correct) as expected. When prices go down or up and then, traders will actually face losses.

One of the stages of trading using Bollinger Bands that you can take advantage of is when the market is sideways. When the price has crossed the SMA-20 line (with the nearest band level as the target), then you can enter (open position). With determination:

  • If the price has passed the SMA-20 level with an upward movement, until you enter when the closed candle exceeds the SMA-20. If the price has reached the Upper Band, you can close the position (exit)
  • If the opposite happens is that the price passes the SMA-20 but with a decreasing movement, enter when the candle closes at the bottom of the SMA-20. When the price reaches the Lower Band, use it as an exit target or close position.

Then, what is the trick to using Bollinger Bands in the middle of a trending market? Although commonly used when sideways, actually Bollinger bands can also be used when the market is trending. What's the trick?

  • When the price has crossed the Upper Band and the price closed outside the band, then an uptrend situation will occur
  • If the price crosses the Lower Band and the closing price is also outside the band, then the situation is a downtrend.

The use of Bollinger Bands is just one of the many markers in trading. Make sure you are well versed in all the risks involved when the marker doesn't bring in the profit you expected.