Trading the Bollinger Bands (Guide)

Trading Review Dec 18, 2020
  1. The Bollinger’s Bands typically serve as moving supports/resistances.
  2. They were created by a guy named Bollingers’
  3. That guy is actually on Twitter AND is he is very much aware of Bitcoin as well (he’s commented on it before). Link = https://twitter.com/bbands?lang=en (His name is John Bollinger — nice guy, I think)

Another thing that the Bollinger’s Bands is useful for is telling us whether a specific coin is going through either consolidation or expansion (larger price action — up or down)

Now, that all of that is established — Check this out.

An Example of ‘Constriction’ in Bollinger’s Bands:

As you can see in the example above — identifying the constriction of the Bollinger’s Bands is important in helping us identify what portion of the price cycle that we’re in accordance with Wyckoff’s theory (source for Wyckoff chart: http://www.wyckoffanalytics.com/wyckoff-method/ )

Here’s an Example of Expansion in the Bollinger’s Bands:

As noted in the picture above, the expansion of the Bollinger’s Bands almost always precipitate a greater overall move in the price action itself.

Another facet of the Bollinger’s Bands (BB), that is worth noting is that the upper and lower bands serve as ‘overbought’ and ‘oversold’ indicators.

Thus, whenever you see price bars outside of the bands themselves, we can confidently say that we are witnessing an ‘extreme’ in price action and that it is more than likely that the price will correction in the very short-term, immediate future. How soon the price corrects depends on the exuberance (heavy pump) or despair (massive sell-off/capitulation candle) of the market itself as well as the time frame used. But, it typically is never more than just a few (5 or less) bars away."

If you’re witnessing such an extreme in price for more than 5 periods (bars) in a row, then there is truly a rare phenomenon going on.

I say this only because the Bollinger’s Bands, by default on TradingView, is programmed to look back reflexively at price and adjust according to the last 20 bars while factoring in an adjustment of 2 standard deviations (remember: bell curve) based on said values.

Here’s the Raw Coded Data Below:

Also, here are a few examples of this phenomenon occurring as well:

Also, just to double back — remember when I was mentioning the width of the Bollinger’s Bands and the ‘expansion’ and ‘constriction’ and all that?

Well, sometimes it’s hard to just ‘eyeball’ this out on a chart by simply looking at the Bollinger’s.

Fortunately, there is a concrete metric on TradingView that is designed to help traders quantify the width of the bands themselves, so that minute increases/decreases in the width of the two bands can be detected with greater ease.

Bollinger Bands Width

This indicator is called the ‘Bollinger Bands Width’ on TradingView. Here is a picture below:

The picture above sort of speaks for itself and lends itself as a cogent example of a proper means of conducting an analysis on this indicator.

Bollinger’s Bands %B

Another indicator that is predicated upon the BB that I find to be extremely useful = Bollinger’s Bands %B.

Simply put, below is an explanation of how this indicator works:

Source: http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce

So, remember how we were discussing that a price that floats on the outside of the Bollinger’s (top or bottom bands) essentially is another overbought/oversold indicator?

Well, the Bollinger’s Bands %B is way of directly confirming this.

Thus, this can not only help us with identifying the price movement of a particular coin (Bitcoin in this case) — but it can also aid in the implementation of trading strategy as well.

Check This Out

Here’s an example of how the Bollinger’s Bands %B works.

Based on the reading that we saw above, there is definitely room for the price movement to continue to expand to the nether region of the Bollinger’s Bands on Bitcoin at this very moment in time.

I’m sure that we could smooth these bands if we really wanted to and play with them in a variety of ways in order to get some unique results, but we’ll get to that on a later idea.

Some Potential Ideas

1.) Created a pine script that adjusts the top and lower band to track the last 20 periods via exponential moving average, Hulls Moving Average, or Difference of Two Squares.

2.) Adjust the period lookback of the Bollinger’s Bands.

3.) Adjust the standard deviation of the Bollinger’s Bands via Pine Script so that the period of lookback & standard deviation automatically adjusts algorithmically (this can be coded) based on the volatility of the underlying project for the previous 100 periods with a fixed upper/lower bounded limit of +/- 10 candle lookback (i.e., at max there would be a 30 candle lookback & at its least, a 10 period lookback).

For the standard deviation, this could oscillate between 3 standard deviations and 1 standard deviation. Someone with a thorough understanding of math would have to be able to code such a script. I’ll probably create it myself with a math nerd and then call it the ‘Adjustable Med Bands’

4.) Perhaps an oscillating function similar to the %K/%D on the Stochastic on the Bollinger Bands %B.

5.) A potential incorporation/integration of both the Bollinger Bands %B and the Bollinger Bands Width.

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Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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