As we all know, Bitcoin has been on a wild ride this year, with it’s price fluctuating so much that it’s hard to make any predictions as to where it will be in the near future. But how can we know for sure if it is overbought or oversold? One of the most popular indicators of this is the use of Bollinger Bands. This is a very simple indicator used to show whether Bitcoin’s price is trending upwards or downwards. It can be used to show a variety of things, including whether the price is in a bull trend, or whether the price is in a bear trend.
Everyone knows that Bitcoin’s price is up and down, but it’s a little trickier to predict when the price will go up or down. This is why I like Bollinger Bands. In a nutshell, Bollinger Bands are a tool that helps you to determine whether or not Bitcoin is overbought or oversold. So, why should you care? Simply put, when the price is high and Bitcoin is overbought, the price tends to move down. When the price is low and Bitcoin is oversold, the price tends to move up.Acting is neither an exact science nor an art. It’s a mixture of both. There are dozens of publicly available indicators, all claiming to be the best. However, none of these measures are perfect and they are not intended to be used in isolation.
One of the most popular indicators used by many traders is the Bollinger Bands, an indicator that can be used to identify price peaks and lows and opportunities to sell short on exhausting rallies and buy on strong pullbacks.
We will learn three simple methods to use this indicator in trading.
What are Bollinger Bands?
John Bollinger developed the Bollinger tapes in the 1980s. The indicator consists of an average band, which is a simple moving average set to 20 periods by default, and two outer bands set to two standard deviations below and above the average band.
Daily chart BTC/USDT. Source: TradingView
As mentioned above, the goal in an uptrend is to buy when price is between the upper band of the first and second Bollinger Bands.
There are several entry points, and a trader should wait until the price closes between the upper bands for three consecutive days before buying, as this helps to avoid unexpected swings.
Traders can maintain an initial stop loss below the median band, but follow it quickly to reduce risk and protect profits. A possible exit strategy would be to sell when price closes below the Bollinger Band above one standard deviation.
The diagram above shows how this strategy is applied. Traders could stand on the 19. December 2020 and stay there until the stops on 11. January 2020. Another buying opportunity occurred on February 7, and on February 23. February, he finally reached the stops.
This strategy should be avoided when the price fluctuates in a range. To increase the odds, traders can only open new positions when the price breaks out of a hard upper resistance.
Bollinger Bands can be a good tool to help traders identify a trend early by noticing a contraction in volatility, which is usually followed by an increase in volatility and a trend phase.
Even if a trader missed an early buy, the Bollinger Bands can be used to get into the trend on pullbacks with low-risk entry opportunities.
The indicator can also be useful to trade in a strong trend phase when corrections are superficial.
There are many different ways to use Bollinger Bands, and this article provides just a few recommendations that traders can explore.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph.com. Every investment and every transaction involves risk. So you need to do your own research before making a decision.
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