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What is Bollinger Bands Trading?
Bollinger Bands trading is a strategy that leverages Bollinger Bands, a volatility-based indicator, to identify key trading opportunities. These bands help traders determine whether an asset is overbought, oversold, or poised for a breakout based on recent price action.
Developed by John Bollinger in the 1980s, Bollinger Bands consist of three components:
- Middle Band: A 20-period simple moving average (SMA), representing the average price over time.
- Upper Band: The SMA plus two standard deviations, marking the overbought threshold.
- Lower Band: The SMA minus two standard deviations, marking the oversold threshold.
Price tends to stay within these bands, making them a powerful tool for trend analysis, breakout strategies, and mean reversion trades.
How Bollinger Bands Trading Works
1. Recognizing Market Conditions with Bollinger Bands
- Bollinger Band Squeeze (Low Volatility): A tightening of the bands signals a period of low volatility, often preceding a breakout.
- Bollinger Band Expansion (High Volatility): Widening bands indicate increasing volatility and a continuation of momentum.
- Overbought Condition: When price reaches the upper band, it suggests a potential reversal or consolidation.
- Oversold Condition: When price reaches the lower band, it signals a potential bounce or trend continuation.
2.
blog.revold.us/bollinger-bands-trading-mastering-volatili...
What is Mean Reversion Trading?
Mean reversion trading is a strategy based on the concept that asset prices tend to revert to their historical average or fair value after periods of extreme movement. The idea is that when an asset's price deviates significantly from its mean, it is likely to return to that average over time.
This strategy is commonly used in stocks, forex, and cryptocurrencies, particularly in assets that show cyclical price patterns or well-defined ranges.
How Mean Reversion Trading Works
1. Identify an Overextended Price Move
- Look for assets that have moved significantly above or below their historical average.
- Use technical indicators such as:
- Bollinger Bands: Prices moving outside the upper or lower bands indicate potential mean reversion.
- Moving Averages: An asset significantly above or below its 50-day or 200-day moving average may be overextended.
- RSI (Relative Strength Index): Readings above 70 suggest an asset is overbought, while readings below 30 suggest it is oversold.
2. Look for Reversal Signals
- Once an asset has deviated far from its mean, traders look for signs of exhaustion or a slowdown in momentum.
- Common signals include:
- Divergence in MACD or RSI, suggesting weakening momentum.
- Candlestick patterns, such as dojis or engulfing patterns, which indicate potential reversals.
3.
blog.revold.us/mean-reversion-trading-profiting-from-pric...