Crypto Investing
23 Nov 2021

Detailed Guide to Bollinger Bands Strategy for Crypto Trading in 2022

Ananda Banerjee

Unlike moving average indicators that are represented by single lines, a Bollinger Band indicator is a three-line, padded-up metric, best known for predicting trends, reversals, momentum, and volatility. If you want to have the Bollinger Bands explained, it is first important to understand the concept of standard deviation.

Key Takeaways

  • Bollinger Bands as an all-encompassing trading indicator
  • How dependent are Bollinger Bands on the standard deviation?
  • Bollinger bands can monitor trend reversals, swings, volatility, and momentum.
  • Timeframe, standard deviation, and SMA period vary as per trading preferences.
  • More extended time frames for Crypto investors using Bollinger Bands
  • M-Tops and W-Bottoms for Swing Traders
  • Bollinger Bounce and squeeze for day trading
  • The efficacy of Bollinger bands can be improved using precise time frames and supplemental indicators.

Market movements are either anticipatory or reactionary. While experienced traders are often well-versed with both, trading the crypto space with an eye on price action often gets trickier for beginners. 

Don’t we have technical analysis to make life easier for the new players! 

We do, but the score of technical indicators is difficult to manage, especially in a market that doesn’t give a lot of time to adjust. Unless you plan on holding on to an asset for long, it is necessary to keep a few reliable technical indicators in hand to assess market volatility, momentum, and the overall trend.

Well, we could happily enlist indicators for each parameter or simply discuss Bollinger Bands that track each of the mentioned aspects related to the crypto-space and that too with significant levels of accuracy.

Note: There is nothing as the best technical indicator. However, crypto traders must learn to use every pointer, depending on the market condition, trends, and even the fundamentals of the concerned player. Bollinger Bands are different as they are more inclusive and allow you to perceive, detect, and even back engineer profitable traders, depending on the associated metrics.

Standard Deviation and its Role in the Crypto-Space

Often thrown around as a mathematical lingo, standard deviation signifies the spread of the crypto price from its mean. It also wouldn’t be wrong to say that the entire price-action charade in the asset class space is hinged on the concept of standard deviation as traders make and lose money only when prices move up and down, relative to the market price. 

Bollinger Bands Strategy

Standard deviation finds its place in Bollinger Bands, with the upper and lower bands being dispersed from the middle band, as per the preferred value. In simple terms, the middle band signifies SMA or simple moving average, whereas the outer bands are positioned relative to the SMA, plus or minus the standard deviation. 

Still confused! Read on to understand the concept better in relation to market parameters.

Types of Indicators on Bollinger Bands

Volatility Indicator

In any market involving asset class, prices move in patterns. However, the deviation often signifies the market volatility, as it directly relates to a standard deviation. Therefore, it is safe to say that narrow bands, i.e., outer lines moving close to the SMA or middle line, indicate a range-bound or less volatile trading space. 

Trend Indicator

Despite the occasional thrills, Bollinger Bands keep to the roots, with the middle band being the standard SMA. Therefore, if you follow the 20-SMA line against the candlesticks, you might just be able to predict the market trend and take calls accordingly. 

Momentum Indicator

Bands and candlesticks can work in tandem to determine asset momentum precisely by identifying the overbought and oversold regions. If the price of the given financial instrument moves upwards, i.e., closer to the upper band, you might be looking at an overbought signal and vice versa. 

But wait! One indicator, three indications! What’s the catch?

Well, the catch here is the timeframe of analysis, which eventually determines how you read Bollinger bands and what kind of trades you can pick with the analysis. 

Important: Signals given by higher SMA lines are more accurate. Similarly, higher standard deviation offers more accurate signals but the instances are low as candlesticks hardly cross the bands when standard deviation is 3, as compared to when it is 1, which then results in an elevated number of signals but with added risks. 

How to Read Bollinger Bands?

Before we can go about reading Bollinger bands, it is necessary to make certain standard assumptions for the sake of understanding. A standard Bollinger band setup comprises the 20-SMA (Simple Moving Average for a period of 20) middle line and an upper and a lower line, placed at plus-2 and minus-2 standard deviation. However, if you are plotting the same, you are free to choose the SMA period and standard deviation, as per your preferences and risk appetite.

Well, we will come to that later!

Continuing with the analysis, these three bands, from the simplest standpoint, determine the support and resistance level of the given financial asset. However, depending on the timeframe, the utilities change, and the bands become relevant to specific use cases. 

How to Use Bollinger Bands?

Viewing the upper envelope and lower envelope in relation to the SMA can help crypto traders decipher range-bound markets better. Plus, the volatility of the crypto-space is best handled by the Bollinger bands, which are pretty useful when swing traders need to find perfect entry and entry points. 

Bollinger Bands for Crypto Investors

If you plan on holding the instrument long, reading Bollinger bands in the monthly time frame is a better option. In this case, you need to consider oversold regions or the points where the price hits the lower band as value buying opportunities. Exiting long-term positions with profit is advisable at points where the price touches the upper bands. 

Note: Bollinger Bands’ trading strategy analyzed over a monthly time frame is synonymous with the ‘Buy on Dips’ plan. 

Also, following a more targeted set of parameters, setting a 50-day SMA and 2.5-standard deviation has proven to guarantee better results! 

Bollinger Bands for Short Term Traders (Swing Trading)

As far as the parameters are concerned, an hourly time frame is good enough, followed by 20-SMA and 2-standard deviation. At this point, you must first gauge the trend by looking for M-Tops, i.e., patterns with lower highs, and W-Bottoms, i.e., patterns with higher lows. In the first case, you should concentrate on short sell calls whenever the price touches the resistance, i.e., upper band.

For W-Bottoms, the instrument seems to be in an uptrend, and therefore, buy calls are preferred whenever the price hits the support levels, i.e., middle and lower bands. However, swing traders must take calls after considering the risk-to-reward ratio and setting a risk management plan or, rather, stop-loss. 

Note: For beginners who are unsure about where to put stop loss, it is advisable to place one lower than the support while buying and above the resistance while shorting.

Bollinger Bands for Day Traders

Day traders can follow several strategies to make money in the crypto-space. But then, it is necessary to shorten the time frame to 15 minutes, use the 10-SMA metric, and set the standard deviation to 1.5 for getting risky yet significant signals.

The best strategy in a market with low volatility is the Bollinger Squeeze, which signifies the fact that a breakout often follows band narrowing or squeezing in either direction. Squeezed Bollinger denotes a range that can be drawn using horizontal lines or a rectangle. If the price breaks the range and falls below the lower band, you can expect a down move. 

For an up move, the price needs to break the range upwards, cutting through the upper band. In a volatile market, day traders can follow uptrends and downtrends closely to take entry and exit calls. 

Crypto markets operate 24×7, which makes 28-SMA or 30-SMA a more reliable middle line indicator as compared to 20-SMA. 

Indicators that Work Best with Bollinger Bands

Bollinger Bands have a surprisingly high failure rate when used as standalone indicators. But you shouldn’t be fretting over it, at least not yet!

This is why it is advisable to pair them with the likes of Moving Average Convergence Divergence, 3 EMA, RSI, or even Bollinger Band Variations to determine the exact trading window for the given crypto-currency. 

Bollinger Band Hacks that Minimize the Risk 

Is Bollinger band a sure-shot trading strategy? Not by a long shot as the market, especially the crypto-space, is anything but predictable. Despite the output, there are a few pointers to take note of to make Bollinger band indicators safer than usual.

Determine Bounce and Squeeze with Precision

Bollinger Bounces take support and resistance levels into account, whereas squeezes take standard deviation and Bollinger Variations into consideration. Therefore, finding the right supplemental indicator is vital to making the Bollinger Bands strategy work.

Pick the Right Time Frame

Trading strategies using Bollinger Bands might change depending on the timeframe of analysis. The best advice here is to ascertain the trading habits and preferences at first and then select the right frame to get accurate signals.

Regardless of the perspectives, analysis, and mathematical jargon, the efficacy of Bollinger Bands as an indicator remains debatable. Still, it is an excellent indicator considering its omniscience and the ability to work harmoniously with other indicators. 

FAQs on Bollinger Bands

Q1. How do Bollinger Bands work?

A1. Bollinger bands work by letting you gauge price action in relation to the simple moving average over a given time frame. 

Q2. How to read Bollinger Bands?

A2. Reading Bollinger bands depends on which time frame you are following. Regardless, you should look to gauge the trend to take buy or sell calls, analyze value buying points, and eventually look for squeezes. 

Q3. How is Bitcoin moving average calculated?

A3. Bitcoin moving average takes the closing price for each day, over a given period, into account. You must add the prices and eventually divide them by the preferred period.

Do you think Bollinger Bands can help you fine-tune the crypto trading strategy! Download the app right now to get started and put the insights to the test.

P.S: KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.


Ananda Banerjee

Content Writer

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