Bollinger Bands are very useful for crypto price prediction and trading in general. It is a technical indicator that uses price bands to inform you of the best time to buy and sell a particular cryptocurrency based on its price movement. If used well, especially with other indicators, it could fetch you a ton of profit.
So, in this article, we’ll cover Bollinger Bands, how they’re calculated, and the best ways to use the indicator. Without further ado, let’s dive in.
What is the Bollinger Bands Indicator?
Newbie traders often wonder “how to read Bollinger Bands crypto,” which is understandable given that they confuse beginners.
Bollinger Bands is a technical analysis tool that consists of three bands—a moving average and upper and lower bands—that measure volatility and indicate potential price reversals in the crypto market.
When trying to understand this technical indicator, the first thing to note is that Bollinger Bands is a trend or volatility indicator. This means that they tell the direction of a price trend, which could be used to determine when reversals occur.
A reversal in crypto trading is a phenomenon that occurs when the momentum of a cryptocurrency’s price changes direction. That is, if the price was falling before, a reversal happens when it suddenly begins a bullish movement.
Moving on, Bollinger Bands indicate price movements by taking advantage of price bands. It uses three bands specifically: the upper band, the lower price band, and the middle band. Among these three, the middle band seems to be the most important, and you’ll see just why in a bit.
What Do The Bollinger Bands Mean?
Bollinger Bands are similar to other technical indicators that utilize bands and lines like the Relative Strength Index. Typically, upper bands represent resistance, and lower bands support. Let’s take a deeper look into how Bollinger Bands work.
The Middle Band
Bollinger Band’s middle band is a simple moving average (SMA) of the crypto or DeFi asset’s price over a specified period. Typically, this is 20 periods, which could be hours, days, or weeks. Most traders use days.
This line shows the mean price of the cryptocurrency over the 20 periods and is very useful for determining the two other bands.
The Upper Band
The upper Bollinger Band represents resistance or the upper limit of a price’s volatility. It uses a relatively complex calculation, but basically, it involves adding a specified number of standard deviations (usually 2) of the price to the middle band.
This makes the upper band fluid, expanding, and contracting because of the fluctuation of crypto prices. Typically, when a cryptocurrency’s price line reaches or crosses the upper band, it suggests that it has been overbought in the short term and may soon drop in price.
The Lower Band
The lower Bollinger Band represents support. It is the lower extreme of a cryptocurrency’s price volatility. Like the upper band, its calculation is dependent on the middle line.
To calculate this band, you subtract some standard deviations (most often 2) of the price from the middle band.
Since the lower band means support, a price reversal is in order when a cryptocurrency’s price nears or goes below it, and a bullish trend may occur soon.
Importance of Bollinger Bands in Crypto Price Prediction
Bollinger Bands are very useful for crypto price prediction. You can use it as a trader to accomplish any of the following.
Entry and exit signal generation
One of the primary reasons traders use Bollinger Bands is to generate trading signals. Because of how well the indicator can identify trend movements, Bollinger Bands crypto trading strategies are beneficial for crypto trading. Important events like the Bollinger Band Squeeze, which occurs when the bands contract towards the middle band, indicating a potential breakout, are peculiar to the indicator and make for valuable signals.
Divergence confirmation
When you combine Bollinger Bands with an indicator like the RSI, you can easily spot when divergence occurs and take action immediately. Divergence occurs when the price makes a lower low, breaching the lower Bollinger band, but the RSI makes a higher low (below 25). This is a great signal to enter a long position.
Volatility Measurement
You can also use Bollinger Bands to measure how volatile the market is. When a cryptocurrency’s price moves sideways, it’s not a great time to make trading decisions. And you can tell when this is happening using this indicator. Wider bands indicate higher volatility and stronger price movements, which is ideal for trading. Conversely, when the bands are contracted, the market is less volatile.
Overbought and Oversold Conditions
Like oscillators, Bollinger Bands can identify overbought and oversold conditions in the crypto market. For instance, when a crypto’s price nears or crosses the upper band, the cryptocurrency has likely been overbought, and the price may drop soon, signaling a selling decision is in order.
On the other hand, when the price line drops below the lower Bollinger Band, it has likely been oversold, and an upward price momentum may occur soon.
Combining Bollinger Bands with other indicators for effective trading
Bollinger Bands success rate increases when used with other indicators, and there are several of them you can pair it with. Typically, the RSI, MACD, and Moving Averages are some of the most common indicators Bollinger Bands are paired with.
- Relative Strength Index (RSI): We highly recommend pairing Bollinger Bands with the RSI to confirm price trends.
When the price crosses above the upper Bollinger band and the RSI simultaneously crosses 70, it means buying sentiment has likely been exhausted. On the other hand, when the price dips below the lower Bollinger band and the RSI is below 30, it is a strong indicator that the cryptocurrency has been oversold and will soon rise in price.
- Moving Average Convergence Divergence (MACD): The MACD is another excellent indicator to pair with Bollinger Bands. Using them together lets you evaluate trend momentum and generate appropriate signals from your readings.
Typically, bullish signals occur when the MACD line crosses above the signal line while the price is below the upper Bollinger Band. Bearish signals, on the other hand, occur when the MACD line crosses below the signal line while the price is above the lower Bollinger Band.
- Moving Averages: You can use simple and exponential moving averages combined with Bollinger Bands to confirm price trends. For instance, a crypto’s price is above the upper Bollinger Band, and a rising moving average confirms an uptrend. Conversely, when the price is below the lower Bollinger Band and a falling moving average, it confirms a downtrend.
Shortcomings of Bollinger Bands
As helpful as Bollinger Bands are, they aren’t always accurate and can provide false signals. For instance, using Bollinger Bands isn’t a great idea when the market moves sideways. It can quickly generate false signals, so much so that you’re better off using an indicator like the Stochastic Oscillator.
Furthermore, you must always combine Bollinger Bands with other indicators to confirm the price movement direction. And even then, like most technical indicators, Bollinger Bands cannot account for sudden price movements influenced by news and significant events, so you must watch for current happenings.
Luckily, tools like Crypticorn AI Price Prediction Dashboard help you do all of these without any hassle. With sentiment analysis, a wide range of technical indicators, and even price prediction capabilities all in one place, trading has never been easier.
Conclusion
Bollinger Bands are a very common indicator for crypto price prediction today. In this article, we’ve explained what it is, how to use it, and the best indicators to pair it with. Hopefully, with the information we’ve provided, you can begin implementing your Bollinger Bands crypto trading strategy.
FAQ
What is the best setting for Bollinger Bands crypto?
The best setting for Bollinger Bands in crypto depends on your individual preferences. However, if you’re just starting, we recommend you set the period to 20 and the standard deviation to 2, as these are traditional settings that work well in combination with other indicators.
What works best with Bollinger Bands?
The Relative Strength Index or RSI tends to work best with Bollinger Bands. For the best Bollinger Bands success rate, you should consider a strategy where both of them work together for the best Bollinger Bands success rate.
Do professionals use Bollinger Bands?
Yes, professional traders use Bollinger Bands for technical analysis in crypto trading. However, they usually combine it with other technical indicators, such as the RSI, for a higher success rate.
