Is Bitcoin overbought or oversold? Use Bollinger Bands to find out!
Trading is neither an exact science nor fine art. It is a mixture of both. There are scores of publicly available indicators and each claims to be the best. Notwithstanding, none of them are perfect or designed to be used in isolation.
One of the more than popular indicators widely used past several traders is Bollinger Bands, an indicator that can be used to spot price peaks, lows, and opportunities for shorting during wearied rallies and buying during sharp pullbacks.
Let's learn three simple methods to use this indicator in trading.
What are Bollinger Bands?
John Bollinger created and copyrighted the Bollinger Bands in the 1980s. The indicator consists of a eye band, which is a simple moving average whose default is fix at 20-periods and two outer bands fix at ii standard deviations below and above the middle band.
Its nearly bones apply is to identify whether the price is high or low on a relative ground. If the cost is above the upper band, the asset is perceived to exist overbought. On the other paw, if the toll dips below the lower ring, the coin is believed to be oversold.
However, many traders brand the fault of assuming that the asset price volition drib when it reaches the upper band, or that a rally will start when the price hits the lower ring.
This mostly happens only when the toll is stuck in a range. Equally with any other indicator, assumptions can hands lead to huge losses in a trending market so looking for confluence from a number of metrics is withal a good pratice to employ.
Let'due south look at a few ways traders use the Bollinger Bands.
Bollinger Bands can spot volatility squeezes
Co-ordinate to John Bollinger, avails switch between phases of low volatility and high volatility. Therefore, after periods of low volatility, traders may expect the volatility to shoot up, which could result in trending moves.
The above chart shows how XRP's volatility dropped sharply between mid-September to mid-November 2020, marked every bit an ellipse on the chart. After near two months of this depression volatile phase, the volatility shot up and the XRP/USDT pair offered an excellent trading opportunity.
In the above example, Binance Coin (BNB) was in a downtrend and the volatility tightened between the terminate-September to mid-November 2018, marked as an ellipse on the chart. Here, the volatility expanded to the downside and the BNB/USDT pair resumed its downtrend.
A volatility squeeze does not predict the direction of the next breakout. Sometimes, the market makers nudge the toll to a higher place the upper band and below the lower band, trapping the novice traders. Therefore, traders may avert pre-empting the direction and wait for the price to either intermission above the resistance or below the support of the range earlier establishing a position.
The above chart shows how the overly eager bulls and bears tin become trapped. On Oct. 22, 2020, the bulls pushed the price above the upper band simply could not clear the resistance at $five.77. After a few days on Nov. 3, 2020, the price pulled below the lower band simply did not break the support at $iv.58.
Ethereum Archetype (ETC) bankrupt above $5.77 on Nov. eighteen, 2020, but information technology was not a perfect trade as the price did non start a strong uptrend. The marketplace makers went hunting for buyers' stops and also tried to trap the bears with the sharp drop on Dec. 23, 2020.
However, the price quickly climbed back above the lower ring on December. 24, 2020, and the ETC/USDT pair before long started a stiff up-motion.
Therefore, instead of relying only on the betoken from the Bollinger Bands, traders should as well look for confirmation from other supportive indicators or use the back up and resistance lines.
Bollinger Bands can indicate when to buy during a pullback
A pullback in an uptrend is usually a buying opportunity every bit the main trend tends to reassert itself. When the center band slopes upwardly and the cost trades in the area between the middle band and the upper ring, it is a sign of an uptrend. In this scenario, traders may wait for the bounce off the middle band to initiate long positions.
Litecoin's (LTC) chart shows the start of an uptrend in mid-February 2019 as the middle band turned upwards and the price traded between the middle band and the upper band. After that happens, traders may effort to buy the rebound off the middle band and keep the stop-loss just below the swing depression.
At that place were five possible entry opportunities for a conservative trader. Four of them turned out to be winners just ane would have hit the stops. This shows how no strategy is perfect, hence a stop-loss should always exist used to limit the run a risk.
Solana (SOL) turned downward from above the upper band on Sep. 1, 2020, and bankrupt below the heart band on Sep. 3, 2020. Since and then, the price largely remained inside the lower ring, which turned down on Oct. 2, 2020. That confirmed the downtrend and gave an opportunity to traders to short on October. xiii, 2020, as the downtrend resumed, following a move to the middle band.
Ii Bollinger Bands can be used to track potent uptrends
One of the most profitable ways to trade is to buy and hold during strong uptrends. However, this is easier said than done because several traders sell besides early out of fright and others go along waiting for the dip.
This is where the double Bollinger Bands tin can come in handy. Its use has been popularized by Kathy Lien, the managing director of FX Strategy for BK Asset Direction.
To construct the setup, traders utilize the default value for the outset Bollinger Bands. For the 2nd Bollinger Bands, go along the value of the moving averages the same at 20-day SMA but reduce the value of the standard divergence of the outer bands to 1.
As shown above, in an uptrend, the aim is to buy when the price trades between the upper ring of the offset and second Bollinger Bands.
There are several entry opportunities possible and a trader would wait for the price to close between the upper bands for three successive days before buying considering this tin help to avoid unexpected whipsaws.
Traders can continue the initial stop-loss below the middle ring merely quickly trail information technology higher to reduce the risk and protect profits. Ane of the possible exit strategies would exist to sell on a close below the upper band of the Bollinger Bands with one standard deviation.
The chart above shows how the strategy is used. Traders may take entered on Dec. 19, 2020, and remained in the merchandise until the stops hitting on Jan. 11, 2020. Some other ownership opportunity arose on Feb. 7, which finally striking the stops on Feb. 23.
This strategy should exist avoided when the price is aquiver in a range and to ameliorate the odds, traders could only open up new positions when the toll breaks out of a stiff overhead resistance.
Key takeaways
The Bollinger Bands tin can be a adept tool to assistance traders in identifying a trend early on past spotting the volatility squeeze, which is usually followed by an expansion in volatility and a trending phase.
Even if a trader missed ownership early, the Bollinger Bands tin can be used to bring together the trend during pullbacks with a low-chance entry opportunity.
The indicator can as well come up in handy for trading a strong trending phase where corrections are shallow.
At that place are many unlike ways to use the Bollinger Bands and this article simply provided a few guidelines that traders tin explore.
The views and opinions expressed here are solely those of the author and practise non necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves hazard, you should carry your own inquiry when making a conclusion.
Source: https://cointelegraph.com/news/is-bitcoin-overbought-or-oversold-use-bollinger-bands-to-find-out
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