Bollinger Bands were first developed by John Bollinger in 1980. This technical indicator measures volatility and relative over-and under-valuation of price based on moving average data plotted based on standard deviations. The band consists of the upper and lower lines on the graph. In general, bands widen with increased volatility and converge with reduced volatility.

*What are Bollinger Bands?*

The
bands are three basic trendlines. A moving average and a low and upper band.
Each of these trend lines can be adjusted as necessary. Before adjusting a band
it is important to know what moving average to use. The four best examples for
bitcoin are the 21 week moving average for long-term Bitcoin trades, and the 8
week moving average for short-term trends. The 50, 100, and 200 week moving
averages also have some interesting price history correlations.

Once
the moving averages are adjusted it is also necessary to adjust the standard
deviations or the upper and lower bands. This is because more or less price
data affects how often the price will remain within the bands.

Typically,
the price should remain approximately 90 percent within the bands. Generally,
the 10 day moving average is 1.5 standard deviations between the mean; the 20
day moving average is set at 2 standard deviations between the mean, and the 50
day moving average is set at 2.5 standard deviations between the mean. Standard
deviations help to determine the variance (or spread) of an average. It uses
the data set to measure the value, which is why it is often used for
statistics. Knowing the standard deviation of price data can help to give clues
to when price action shifts.

To
make things simple, the standard deviation is calculated by square rooting the
difference between the plot point and the mean (average). This helps to measure
statistically significant changes. Scientific studies use this metric often and
it is widely accepted that over 0.5 standard deviations above the mean are a
statistically significant change. This means that all data points are
calculated with equal weight. This means that the metric does not take into
account more recent data that may be more significant.

Bollinger (the person) took this calculation and started experimenting with it. In
general that habitual use of the Bollinger Band is the 20 week moving average
with the upper and lower bands set at 2 standard deviations above and below the
mean (in this case the moving average).

One of the main advantages and disadvantages of moving averages is that it is an indicator that is backward-thinking. They don’t try to guess where the price is headed and only show that the price is below or above the mean based on a particular dataset. Adding in upper and lower ranges helps because it shows how under- or overvalued the price is and gives a bit more details as to where the price could potentially go. This is because roughly 90 percent of the data is contained in the band. If the price goes below or above the band then it is possible that it will not stay that way for long.

*Strategies:*

The
main strategy used is when the bands come close together. This is generally
called a squeeze because the bands are squeezing up against the moving average
which means that there is a small range between the standard deviation above
and below the mean. Generally, this indicates increased volatility in the
future. In the reverse case, the wider the bands move apart from one another,
the likelihood there is for decreased volatility. This indicator does not
attempt to show in what direction these potential moves will do in the future,
only that a move could potentially happen, whether or not it breaks up or
breaks down.

Since
90% of the time price moves between the bands, it is reasonable to expect that when the price
reaches the upper or lower bands there is potential for the price to reverse or diminish its volatility before continuing on the trend. Unfortunately, the
bands only give an indication as to what may happen. There are certain times
when even if the price goes above the Bollinger band it will not reverse in
trend, therefore it is important to think of all possible scenarios as
plausible.

This
does not mean that trading within the bands is a bad idea, in fact, many people
who use Bollinger bands do just that. It just means that high volatility
happens, or in the case of a short-term bull or bearish cases might not conform
well based on a standard deviation of a data set because of other factors
involved. One of the other main points to keep in mind is that, once again, Bollinger
bands use moving averages. The more information the dataset has, the more
accurate it will be. Therefore Bollinger bands are more appropriate for longer-term moves.

Other
strategies that are frequently used are double bottoms in the Bollinger bands.
In other words, the price of the asset hits the bottom of the band twice. This
is not to be confused with the price. The price of the lower band could very
well have changed because as we have seen everything about this metric is based
on moving averages.

The last noteworthy strategy is to enter in a position if the price is holding support at the moving average that is being referenced. This may indicate momentum and (obviously) indicates that the asset is moving up.

**Conclusion:**

As
we have seen, the Bollinger band is an indicator that uses moving averages.
This means that it is focused on past events rather than future possibilities.
Therefore it is strongly recommended by Bollinger himself to use other
indicators that do not correlate with it. Using indicators with other variables
such as the MACD (Moving average divergence/convergence), the RSI (relative
strength index), and volume are ways to add in new information to reduce false
positives and help determine the particular trade an individual is engaged in.