Using Bollinger Bands in Crypto Trading

Using Bollinger Bands in Crypto Trading

Predicting the future price of Bitcoin and other cryptocurrency assets is like navigating uncharted waters. Volatility rules but amid the uncertainty, there lies potential. 

In a space where volatility goes from 99% down to multiple Xs up, timing the market is key. Many crypto traders use the Bollinger Bands to identify range-bound trades and assess volatility, making it an ideal tool for monitoring momentum. 

What are Bollinger Bands?

Often used by crypto traders to find entry and exit points, Bollinger Bands offer insights into an asset’s price volatility, possible reversals, and trend strength. 

Example of Bollinger Band indicator on GRVT

Three aspects to take note:

  1. The Middle Band: a simple moving average (SMA) indicating the average price over a specific period, usually 20 periods
  2. The Upper Band: upper boundary line positioned two standard deviations above the Middle band
  3. The Lower Band: lower boundary line positioned two standard deviations below the Middle band

The bands expand or contract with price changes, indicating low volatility when squeezed and high volatility when widened. 

Buy and Sell Signals

Here are some tips to use Bollinger Bands and spot potential buy and sell opportunities.

Buy Signals

  1. Watch for the Bollinger Band squeeze: When the upper and lower bands converge, it signals low volatility. This can foreshadow a significant price shift and potential buy signals.
  2. Monitor for a breakout: Following a squeeze, watch for a decisive price move above the upper band (long trade) or below the lower band (short trade). A breakout indicates the potential start of a new trend. 
  3. Use other indicators: Reinforce your buy signal with other indicators like Relative Strength Index (RSI) and Moving Averages. A case in point - a buy signal is stronger when the RSI is oversold and rises as the price breaks above the upper band. 
  4. Set a stop-loss and take-profit: Mitigate risks with a stop-loss order below the breakout point to limit potential losses. Alternatively, set a take-profit order at a strategically chosen level considering expected price movement and your risk-reward ratio.

Sell Signals

  1. Identify overbought conditions: Watch for potential sell signals when the price nears or touches the upper Band. This suggests the asset might be overbought and a reversal could be imminent. 
  2. Monitor for a reversal: Upon signs of reversal, such as lower highs and momentum loss, consider a potential sell signal. 
  3. Incorporate other indicators: Use other technical analysis tools, like RSI, to confirm your sell signal. 
  4. Set a stop-loss and take-profit: Once again, manage your risks by placing a stop-loss order above your selling point. Align your take-profit level with your risk-reward strategy and anticipated price movements.

Tips on using Bollinger Bands in Crypto

These extended tips will be useful in navigating crypto trading with Bollinger Bands.

  1. Avoid trading in squeezed bands: It is best to avoid entering trades when the bands are tightly squeezed, indicating market indecision. Wait for the bands to expand again before taking action.
  2. Know your perfect timeframe: The 20-period is typically the default setting when using Bollinger Bands. However, you should adjust your timeframe based on your strategy. For traders, shorter periods are more suitable. On the other hand, longer periods are more applicable for long-term investors. 
  3. Understand other factors: You should refrain from using only Bollinger Bands to drive your trading decisions. To prevent a market bias, consider the underlying trend as well as nearby support and resistance zones. If you are a beginner, start trading with a normal setting value first and adjust accordingly as you go. 
Use other indicators like RSI with Bollinger Bands to strengthen your strategy

Focus on the Big Picture

While Bollinger Bands are invaluable, you should not rely solely on them for trading decisions. Always verify with other technical tools as well as understand the market conditions. When you consider a variety of information, you can ensure that you are making informed and potential profitable decisions.

Remember: volatility is inherent in the crypto space. Stay focused on the bigger picture and long-term goals. 

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