Bollinger bands are statistical tools used to analyse and predict market trends.
This employs two input parameters for characterizing the prices and volatility over time of a financial instrument or commodity.
It can be used as an excellent tool to predict volatility and buying condition of cryptocurrency.
John Bollinger, the man behind this tool states in his newsletter:
“It turns out that Bitcoin is a terrific vehicle for Bollinger Band trading. That shouldn’t come as a surprise as we have long known that Bollinger Bands are well suited for forex in general, and Bitcoin is really nothing more than a specialized form of forex.”
The bands are calculated by plotting the simple moving average of a commodity and marking the deviations above and below it. This gives rise to two bands called as the Bollinger bands.
If Bitcoin enters a time of high volatility, this represents space for new trading opportunities. Similarly, if the digital currency’s volatility declines, this means there will be lesser opportunities for a profit through trading.
If the bands become very close, this may mean that volatility will soon increase. Likewise, if these same bands move far apart, this signals that volatility will soon decline.
If the cryptocurrency’s price fall below the bands, that means it is breaking lower, and could be oversold. Investors deem it as good time for purchase.
If bitcoin’s price rise above the upper band, this may indicate that the currency has broken higher, and might be in overbought condition. If the rally continues, investors may want to hold and extend their gains.
The difference between the upper and lower bands has narrowed since January, which indicates very low volatility.
This suggests a run is looming on the horizon. Bearish or Bullish? Depends on what news is to come. It could cause a breakout, taking BTC above the safe limit or it might be headed for another low.