Bollinger Bands - Contraception for your Price Action

So i thought i’d do another educational post, this time on the Bollinger Bands. I’ll try and keep this as a brief introduction to the basics of Bollinger Bands so you can do your own research to fully understand what the indicator is doing and showing, there is no point putting a fancy indicator on your chart if you have no idea what it is showing you. Bollinger Bands measure, Price & Volatility, potential Support and Resistance, & it can also give you a sense of if an asset is Overbought or Oversold, although its best practice to use another indicator to get confirmation of being Oversold or Overbought because the price can walk the Upper and Lower Bands for extended Periods. The Standard Bollinger Bands is composed of a 20-period Simple Moving Average (SMA) which is its Middle Band, it also has an Upper Band & a Lower Band which envelopes the SMA. The outer bands are a +/- 2 Standard Deviation (StdDev) of the 20-period SMA in whatever timeframe you are in. A Simple Moving Average (SMA) is an unweighted average of the Previous 20-period Values in whatever timeframe you are in, so for the 1min chart, the SMA period will be an unweighted average of the previous 20 mins, for the 1hr chart, the SMA period will be an unweighted average of the previous 20 hours, for the Daily chart, the SMA period will be an unweighted average of the Previous 20 days and so on and so on. You are able to change the SMA to any period you want, some trading sites also allow you to change the SMA into an Exponential Moving Average (EMA). Changing the timeframe from the standard 20-period SMA to a faster SMA like a 10-period, will allow faster entry into possible buy & sell points but could be prone to false signals, because of this, most people keep the SMA at the Default of 20-periods to avoid possible false buy/sell signals. You can change the StdDev settings, but you must know what you are doing as you cannot just add any number for shits and giggles, for example, a 20-period SMA is 2 StdDev, a 10-period SMA is 1.5 StdDev and a 50-period SMA is 2.5 StdDev as default. For those interested, & from my understanding of it, the Population Standard Deviation used in the Bollinger Bands system is a measure of the +/- dispersion/variation of the mean or the sum of a collection of values, the values being the 20 periods, so a +/- deviation value away from its Midpoint Basis in whatever timeframe you are in. I won’t go into the calculations because everyone will stop reading & it’ll also hurt my head because i cannot even count. So the + is the Upper Band and the - is the Lower Band. So looking at the Bollinger Bands, we now know that the Middle Band is the basis & the Upper and Lower Bands are +/- Standard Deviations of that Middle Band Basis in whatever timeframe you are in. With Low Volatility, the closer the Upper and Lower Bands are to its Price & Middle Band Basis. The more volatile the Price action is in either direction, the further away the Price will move from its Middle Band and move closer to its Upper or Lower Bands depending on if it’s Bullish or Bearish. Along with the Price, the Upper and Lower Bands will also expand outwards and move away from its Middle Band. With extreme volatility the Price may even wick out or close a candle out of its Upper or Lower Bands. If there has been a period of Volatility which has come to an end, then you will see the Upper and Lower Bands start to contract inwards. You can use the Middle Band as potential Support and Resistance Levels depending on if the Price is above or below it. You can also use the Upper and Lower Bands as potential Resistance Levels, and also as potential entry levels for longs or shorts respectively. The Lower and Upper bands will point outwards and inwards depending on if the Price is contracting or expanding respectively. With normal volatility, if you use the default 20-period SMA & 2 StdDev settings, then the price action will possibly remain within the bands for roughly about 90% of the time. The Price will eventually move back in to the Upper or Lower Bands if there has been a period that the Price has been outside of the Upper or Lower Bands. What is great about the Bollinger Bands is that you can apply it to any chart and timeframe that has enough previous trading data, and use it to get a feel for the assets volatility over time. A key thing to look out for is the Bollinger Bands Squeeze, this happens when you buy latex contraception that’s too tigh……… sorry…… this happens when volatility has slowed & the Upper and Lower Bands contract, envelope and stay close to the Price & Middle Band so essentially Price action is trading sideways within a channel made up of the Lower and Upper Bands. The Bollinger Bands Squeeze Pattern can potentially end in a big breakout upwards or downwards. Bollinger Bands can also be used to see Bullish W-Bottoms or Bearish M-Top signals in the Price. These signals have 4 steps that need to happen for it to be considered valid but i’ll let you do your own research on that. The Price can also walk along the Upper and Lower Bands for an extended period of time depending on if the Price is Bullish or Bearish. It’s best practice to use complementary indicators like Volume, RSI, ADX, STOCH or MACD to try and get confirmation or any potential breakout. I actually use the Bollinger Bands on my charts in conjunction with the Ichimoku Cloud.

On a side note, having a grasp of the basics of the original Bollinger Bands crated by John Bollinger is the first step to really understanding it and properly using it to enable you to make wise decisions with your money/investments. If you have an understand of the original Bollinger Bands, then that can help you with understanding other price enveloping indicators like what David ‘WycoffMode’ Ward has created. David has created his own genius take on the Bollinger Bands called Bad Ass Bollinger Bands, which is quite fascinating because it shows multiple +/- Standard Deviations for whatever timeframe you are in. You could potentially use these as multiple Support and Resistance Levels for whatever timeframe you are in and also look for any potential cascading effect from lower to higher timeframes using these multiple +/- StdDev levels, he does state however that to get the best out of it, you have to use it with his Phoenix Ascending indictor, which from what I’ve seen, i think it complements his Bad Ass Bollinger Bands by showing Momentum, Upwards and Downwards Pressure & potential Trend Crossover, this agrees with what i have said above, about using other complimentary indicators with your Bollinger Bands like RSI or MACD. From what I have seen of David’s Bad Ass Bollinger Bands, one of the many benefits of having multiple +/- Standard Deviations, 8 in total, 4+ & 4-, is that you end up with a closer to 95-99% of the Price action staying within the Bollinger Bands for more accuracy. 99% because if there is extreme volatility, that may still cause a Candle Wick to poke its head out. This new indicator is potentially a real game changer. This is just my opinion from what i have seen of it, so i could be completely wrong & David could say it doesn’t mean anything that i've typed and he’s gonna hunt me down for typing complete bollox. Below is a pic to show you the differences between the original Bollinger Bands and the Bad Ass Bollinger Bands.

In any case, it’s best practice that when using your charts, you should have a range of indicators to complement each other, an indicator for Momentum, Volatility, Trend, Price, Volume ect. You do not need to add 4 indicators on your chart that show the same thing. If your using RSI then you don’t really need the STOCH, If you’re using MACD then you don’t really need ADX or Parabolic SAR.

If you’re interested in learning more about the Ichimoku Cloud System, please click on the below pic which will take you to an educational post i did about it.

I hope you have found this brief intro helpful & i hope it encourages you to do your own research to find the best trading strategy for you. Cheers 👍

Comment:

Here is an example of using the Bollinger Bands on different timeframes to see if there is any cascading buying or selling effect happening. For this i have used the 5min, 10min, 30min & 1hr charts.

Comment:

Here is another example of using Lower to Higher timeframes like the 30min, 1hr, 4hr and 6hr charts but this time using The Bad Ass Bollinger Bands created by David Ward, which has the Multiple +/- StdDev Fib Levels. It allows you to gain finer detail when checking to see if there is any cascading price movements up or down, or if there is any cascading effect with the Bands like expanding or Contracting and also checking if any of the +/- StdDev Level has become Potential Support or Resistance Levels in those Lower Timeframes timeframes. I hope this is helpful 👍