At the start of their career, many traders usually wonder how the market can be actually predicted? Is it even possible and if so, how can it be achieved? The answer is actually pretty simple - with a help of technical analysis tools.
The main feature of this approach lies in the detailed analysis of the price movements in the market. It helps to study supply and demand on the market and understand in what direction price most likely to go in the future.
In the 1980s the famous market technician John Bollinger was working on making a strategy using the moving average and standard deviation calculation to understand how the price of an asset can change from its actual value. This way you can see when the market becomes volatile by the widened bands and, on the other side, check the less volatile times when the band contract.
Basically, Bollinger Band is a combination of 3 lines only: centre line and 2 channels above and below it. The central line is a well known exponential moving average and the price channels (or bands) are the standard deviations of your asset. Moving average helps a trader to see the trend better, while bands are the best for monitoring the trading activity around your asset.
Sounds great, isn’t it? But what are the rules of using it in the real life? In the moments, when you see that the price of your asset reaches the upper Bollinger Band repeatedly, the prices can be considered as overbought. On the contrary, when it reaches the lower band, it’s a clear oversold and it’s time to enter the market.
Usually, if a price of your asset reaches the band and crosses it, it signals the start or continuation of the trend. So, while the price touches or crosses the upper band, it’s an uptrend and if it is the lower band instead, it’s a downtrend.
Bollinger Band can be a great help for every trader, but we recommend you not to rely on it only in your work, but combine it with the other indicators and adjust to your strategy to reach the best trading results.