What Are Bollinger Bands? Everything Explained

Bollinger bands help us determine the state of the market, i.e., whether the market is in an overbought or oversold state.

What are Bollinger Bands?

Bollinger bands are indicators mainly used by traders while trading in the cryptos. Day traders mainly use it to check whether the assets are oversold or overbought. Day traders do not only use this indicator, but investors prefer it for swing trading to check whether particular crypto is overbought or oversold and decide to trade the crypto or not.

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Bollinger Bands
Bollinger Bands

How do Bollinger Bands work?

Bollinger bands mainly work on three indicators indicating the particular crypto is overbought or oversold.

The three indicators are as follows:

  1. The middle is the simple moving average, combined with two bands
  2. One is the lower band
  3. The upper band

So while traders are trading, they follow a simple rule: if the price moves closer to the upper band, then it is overbought time to sell particular crypto. Vice versa, when the price moves near the lower band, it indicates the specific crypto is oversold time to buy it.

Investors prefer it if they are looking for swing trade. If a particular asset looks oversold, they buy it considering it the right time to enter, and when the price moves towards the upper band, they sell their crypto and earn profit. Swing trading is a different concept; it would take weeks, even months, sometimes years, as the Bollinger band moves to the upper band, indicating it is overbought and the right time to exit.

Also Read: What are the Trading Signals?

Can I make Profits using Bollinger bands?

Bollinger band is a handy tool or an indicator to predict the overbought and oversold condition of the particular crypto. That is why most traders and investors use it for trading in crypto.

But it is an indicator, not a surety. Various factors responsible for particular crypto to move upwards or downwards indicators act as a future eye for us to predict the possible price where it could go. So you can definitely earn profit but not from the next day. It would take time first to understand the market and master the indicator.

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Kaushal Mandal

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