In this section. you will learn –
The Bollinger Bands Indicator is an oscillating indicator.
Traders use it to measure the volatility of a market.
The Bollinger Bands can help you to identify points at which the price of an asset is high or low relative to its recent average. This can in turn help you to predict when price might rise or fall to its average level.
Three main lines make up the Bollinger Bands indicator.
Most of an asset’s price action will take place within two outer bands, meaning they can be used to predict reversals.
It is important to remember that just because price may reach the outer bands does not always mean it will reverse.
Always look for further confirmation from another indicator, or by using candlestick analysis before you place your trade.
You can also use the distance between the bands to indicate how volatile the price of an asset is.
You can change the settings of the Bollinger bands indicator to suit your own personal strategy. The first setting you can change is the period setting.
Altering the period setting will alter the number of periods on which the Bollinger band is calculated. The standard period setting is 20.
If you change this to a lower setting, 10 periods for example, then the indicator will be more sensitive to price movements.
Conversely, if you change this to a higher setting, 30 periods, for example, then the indicator will be less sensitive to price movements.
The second setting you can change is the standard deviation setting.
Changing the normal deviation setting will alter how much of the data from the moving average’s normal distribution pattern is included in the bands.
The default standard deviation setting for Bollinger bands is 2.
If you are hearing the term “Standard Deviation” first time –
Standard deviation is a measure of how much the values in a set of data vary from the average value of that data set. In the context of Bollinger bands, the standard deviation setting refers to the amount of price action that is included in the bands.
If you set the standard deviation to 1, it means that 68% of the price action will be contained within the Bollinger bands. This means that the bands will be relatively tight around the moving average line, and they will not include as much of the price action as they would if the standard deviation were set to 2.
To put it simply, when the standard deviation is set to 1, the bands will be closer to the moving average line and will include less of the price action. When the standard deviation is set to 2, the bands will be wider and will include more of the price action.
We generally prefer to choose ‘exponential’ as our moving average type in the settings of Bollinger Bands Indicator because it reacts quickly to the newest data points. In fact here are the whole settings once again –
It’s ma(20,ema,0,n). Period = 20 ; Field = Close ; Type = Exponential ; Offset = 0 ; Underlay = No
Period = 10 ; Field = Open ; Type = Exponential ; Offset = 1 ; Underlay = No ; Generally we assume field is closed.
If we tick the underlay or mark it as yes; it means the candlesticks will appear above the moving average. In this picture the white lined moving average has its underlay as no while the red lined moving average has marked its underlay settings as yes.