What is a Bollinger channel?
Core points
Bollinger Channel is a trend line chart composed of three smooth curves, with a 20-day average in the middle line and ±2 standard deviations in the upper / lower line.
The Brin channel can be used to confirm the volatility range of underlying asset prices and predict future price movements.
Although Brin channel has been widely recognized by technical traders, it still has some limitations.
Detailed explanation of concept
Bollinger Channel (Bollinger Bands), also known as Bollinger Belt and Bollinger Channel, is a technical analysis index invented by technical trader John Bollinger in the 1980s. Bollinger channels are often used to confirm the range of asset price fluctuations and predict future trends. The index can be applied to a variety of securities markets, including stock, futures and foreign exchange markets.
As shown in the figure above, the definition of a Bollinger channel consists of the moving average and the concept of standard deviation, which is divided into the upper, middle, and lower lines:
The middle line is the moving average (MA) of the price over a specific period, and the upper and lower lines are drawn based on the standard deviation of a certain level of the moving average, respectively.
(moving average (MA) is obtained by calculating the average price over a period of time and connecting these points to create a smooth line. For example, for a five-day moving average, you calculate the average closing price over the past five days of each trading day, and then connect these data points to form a smooth curve. )
The Bollinger channel has two parameters, the average period and the standard deviation level. The most commonly used parameters are the 20-day moving average and two standard deviations. Of course, traders can customize the combination of parameters.
Common parameter combinations of Bollinger channels:
Middle line: 20MA
Online: midline + 2 times standard deviation
Offline: midline-2 times standard deviation
The Brin channel is a measure of the relative high or low volatility of asset prices relative to previous transactions. When the market becomes more volatile, the Bollinger channel expands; in periods of less volatility, the channel shrinks.
How to use the Bollinger Channel
When the stock price volatility decreases and the Bollinger channel tightens, it implies that the price trend is forming. As price volatility increases, the Bollinger channel widens, which may signal the end of the trend.
Once the trend is formed, it can be predicted that the potential price trend in the near future will be between the upper and lower limits of the Brin channel.
Technical analysis traders believe that the closer the stock price is to the upper line of the Brin channel, the closer the market is to "overbought"; the closer the stock price is to the offline line, the closer the market is to "oversold". Prices above the ceiling mean they are more likely to fall, which could be a sell signal. The opposite is true when the price breaks through the lower limit.
In addition, the Bollinger channel can be used to predict when the price trend may be reversed or when the trend will weaken. For example, generally speaking, asset prices in an upward trend should not hit the lower line, and if so frequently, it indicates that share prices are likely to reverse or the current upward trend is weakening.
The limitations of Bollinger Channel
The Brin channel has been regarded as a very useful tool by most technology traders, but it still has some limitations:
Like most technical indicators, the Bollinger channel is a lag indicator based on past price data.
Bollinger channel should not be used as a single judgment index when making trading decisions. John Bringer also suggests using it in conjunction with providing two or three other technical indicators such as MACD and RSI.
The Bollinger channel defaults to the 20-day moving average and 2 standard deviations, but this combination of parameters is not guaranteed to apply to every security in every market. It is recommended that traders adjust the combination of parameters according to the target and demand in real market trading.
