Crypto Academy Season 2 Week 8 Homework Post for (@kouba01) - Bollinger Bands by @noraiz

Hello dear steemians, I hope you all are doing well. Today I am writing my homework assignment for our professor @kouba01 who has delivered an outstanding lecture on Bollinger Brands. So, let’s start without wasting any time.

1) Define the Bollinger Bands indicator by explaining its calculation method, how does it work? and what is the best Bollinger Band setup?

Bollinger bands were introduced by John Bollinger who used these as an indicator to check volatility levels in market price of assets and to know whether asset are overbought or oversold. It would be easier to understand that, these are basically a sort of price envelopes that define upper price change levels and lower price change levels. These bands are plotted at standard deviation (StdDev.) above and below the moving averages. Price fluctuates between the upper and lower levels.

How this indicator works:

Market Volatility
Market volatility can be predicted simply by checking the distance between the bands. If bands are far from each other, the market is predicted to be more volatile and if the bands are near to
each other, the market is predicted to be less volatile. For Bollinger bands, we can use any time frame chart so I am using a BTC/USDT pair for 1month time frame.

 

^{Screen taken from Binance application}

You can see in the above price chart that when distance between the bands has risen, the market volatility has risen and when the distance has shortened, market volatility has also decreased. Now, as the bands are tightened in a low volatility period, the chances are that the
price will move sharply in either direction. It initiates a trend shift. If the bands are separated by an unusually large distance, volatility increases andthe existing trend ceases.

Prices tend to bounce inside the envelopes of the bands and then move to one band. These oscillations can be used to identify possible profit goals. For example, if a price rises off the bottom band and subsequently goes beyond the moveable average, then the upper band becomes the target profit.

We can also find out the situation of assets whether they are overbought or oversold.

Overbought or Oversold assets

I would like to mention here two important points that can easily tell either assets are overbought or oversold:
If the price has touched the upper line in the band, then assets are oversold.      
If the price has touched the lower line in the band, then assets are overbought. I will demonstrate it by using a price chart.

^{Screen taken from Binance application}

In the above price chart, you can see that when price touches the upper line, the assets are overbought and there is a peer pressure on sellers. In an oversold situation, the assets touch the lower line. At this stage assets are oversold and there is a peer pressure on buyers.
We can also notice price reversals here, because as one trend ends, another trend in opposite direction starts.

Which is the best Bollinger Band Setup

2 parameters are used by Bollinger bands, one is the standard deviation which I have mentioned above and second is the Period. These combinations can be customized but default values are set at 20 for Period and 2 for StdDev. One of the vital roles of Bollinger bands is that
it tell about the price ranges, whether they go or down and I believe it is very important for a trader to know price levels before making investments. These upper and lower bands function in pairs, concurrence with moving average. These pairs confirm the signals that come from other indicators.

2) What is a breakout and how do you determine it? (Screenshot required)

The most common practice to notice breakouts is to check how close or far the bands are from each other. When the bands shrink and approach each other, Bollinger Bands suggest that the volatility in the market is very low and there is no trading going on at the moment. This condition, on the other hand, is an indication of breakout, and candlesticks form outside the ranges on this indicator. The bearish candlestick will form out of the lower band, if the market breaks downwards, and the bullish candlestick will emerge beyond the higher or upper limits of this signal when the reaks upwards. Major reasons of market breakdown are sudden news of investment pull outs by investors or any changing policies by crypto firms that are not
suitable for traders. Now I will demonstrate you by a price chart where I have spotted a breakdown.

^{Screen taken from Binance application}

In the above BTC/USDT price chart, you can see that when price break the resistance levels, the price has gone up. You can also notice that in this breakdown situation, the bands move a lot far away and it indicates high market volatility.

3) How to use Bollinger bands with a trending market? (Screenshot required)

We can benefit from the use of these bands in trendy markets. It makes the coming moves
easier for us. Bollinger bands shift in the direction of the trend in trendy markets. The Bollinger Bands move up when the trend is up and when the trend is down, Bollinger bands will travel down. It is due to the interconnectedness of Bollinger bands with price trends.

In trending markets, volatility is much significant. Assets are overbought, if the trends are up. At this point, there is too much width between the bands and when the trend has fallen, the bandwidth continues to rise. In the below price chart, you can see how we can assess trends from Bollinger bands.

^{Screen taken from Binance application}

The above price chart shows an upward trend and a downward trend. An upward trend
indicates a bullish situation while the down trend indicates a bearish situation. If we talk about upward trend first, it shows that assets are oversold because the price of assets has touched the middle line and if we observe the downward trend, it shows assets are over bought because here again price has touched the middle line.

4) What is the best indicator to use with Bollinger Bands to make your trade more meaningful? (Screenshot required)

Use of indicators is beneficial before making a trade but we should not be dependent of only one indicator. I would suggest use of combination of indicators. I usually use RSI and Bollinger bands to check market volatility and situation of assets (overbought or oversold). Let me show you, how I come up with results when I use both
^{Screen taken from Binance application}

You can see in above price chart of BTC/USDT that how both of the indicators show
similar results. The down trends indicate that assets are oversold and upward indicate that assets are overbought. Both of these indicators RSI and Bollinger bands show efficient results than any other pair.

5) What timeframe does the Bollinger Bands work best on?And why? (Screenshots required)

We can use any time frame for Bollinger bands because it depends on what we want to
analyze. Some traders use short time frames like 15 min while some use longer time frames like 1 day or more. For me, the best time frame is 15 min because it is easy to read it out and make a move according to it. And another reason to use 15 min time frame is that, I am a day trader. I can show you how we can customize price charts.

^{Screen taken from Binance application}

Above you can see that, I have selected 15 min time frame. You can choose as per your
own consent.

6) Review the chart of any pair and present the various signals giving by the indicator Bollinger Bands. (Screenshot required)

I am using here a BTC/USDT pair at 15 min time frame to analyze signals by Bollinger
bands

^{Screen taken from Binance application}

Here I can analyze that when bandwidth is greater, the market is more volatile, when bandwidth is smaller, the market is less volatile and when price touches the upper line, it indicates oversold signal meaning a buy move and when price touches the lower line. It indicates an overbought signal meaning a sell move

Conclusion

Bollinger bands are useful to understand market trends and when to make a move. We can
also check the volatility of market because it is one of the critical aspect of
Cryptomarket. Moreover, if use a combination of indicators, we can get more
precise results

Cc:

@kouba01