Getting into the cryptocurrency trade as a novice can be quite challenging at first. You may miss several entries and exit points, which could lead to losses and frustration may drive you out of the industry. Apart from the limited knowledge that you have on trading, the high volatility associated with the cryptocurrency market does not make things easier.
However, all hope is not lost as several trading tools have been designed to make the playing field a bit-level for all players, including the amateur. The technical indicators make it easy for you to identify the entry points and exit points in the market. The Bollinger Bands are an example of such indicators that will help you identify trends and opportunities in the market.
What it is
A Bollinger Band is a type of technical analysis indicator that’s defined by two lines (upper and lower line) plotted away from the simple moving average of an assets price. The Bollinger Bands were developed by the renowned technical trader, John Bollinger.
Applications of Bollinger Bands
In the cryptocurrency trade, the Bollinger Bands are used when determining whether a currency has been overbought or oversold. You can use the Bollinger Bands to track a cryptocurrency like Ethereum for a specific period, and then use the information from the formations of the Bollinger Bands to make trade decisions.
Since the Bollinger Bands can identify optimal entry and exit times for a given market, they can help minimize risks from the high volatility in the cryptocurrency market.
Core ideas of the Bollinger Bands
This is the central concept of the Bollinger Bands. A squeeze (movement of the bands closer to each other) indicates a forthcoming period of increased volatility and trading opportunity.
The wider the distance in between the bands, the higher the chance a currency’s volatility will drop; hence, the most appropriate time to exit the trade. You should keep it in mind that the Bollinger Band movements are not trading signals as they will not indicate when the change is expected or if the price will go up or down.
This occurs when the price action of the market exceeds the two bands irrespective of the direction taken. A breakout is considered a significant event because almost over 90 percent of the price action occurs within the limits of the bands. However, a breakout is not a trading signal as considered by most traders.
The Bollinger Bands are used to determine the strength of a trend in the market. When the trend has high strength, the price will stay closer to the upper band, and once the trend starts to lose power, the price moves away from the top band.
Bollinger Bands are also used in trading bots that react to technical indicators to make trade moves automatically.
The Bollinger Bands provide a simplified view of the cryptocurrency market. Generally, you should buy when your coin’s price is in between the bottom band and the moving average, and sell when your crypto coin is between the top band and the moving average.