Bollinger bands are an indicator of price volatility, that is, they indicate whether prices in a given period are subject to major changes or not.
In high volatility, it can be used to identify the formation of a significant price change, whereas low volatility identifies a moment of lateralization.
Bollinger bands also give us an operational signal, in fact when they are violated they also give us an overbought (violation of the upper band) or oversold (violation of the lower band) operating signal.
It is calculated as follows (source wikipedia):
The upper band is then obtained by adding the standard deviation to the moving average F times. The central band (if you want to view it) is given by the moving average. The lower band is calculated by subtracting from the moving average F times the standard deviation.
On cryptocurrencies we recommend the standard parameters:
- Period: 20
- calculated on: closing price;
- Standard Deviation 2;
Image 1: Tradingview – bollinger bands on btc – 1 day time frame
In image 1 we can see signs of oversold and overbought marked in black.Circled in green, however, a false signal: the price after arriving oversold continued to fall instead of rising.
As with the other indicators and oscillators, it is therefore advisable to obtain feedback on prices and volumes before carrying out any operation.
- Achille Fornasini, “Financial markets: choice and management of speculative operations – Methods and systems of modern Technical Analysis to support operational decisions”, 1st edition of 1996, ETAS