How to Read Bollinger Bands (BOLL) on Binance: Using Upper and Lower Bands
Bollinger Bands are channel indicators based on standard deviation. This article explains the meaning of the three lines and how to use them in both ranging and trending markets.
Bollinger Bands are excellent indicators for identifying volatility and breakouts. First, log in to the Binance Official Website. For mobile users, use the Binance Official App (see the iOS Installation Tutorial for iPhone users).
Composition of Bollinger Bands
The indicator consists of three lines:
- Middle Band: 20-period Simple Moving Average (SMA20).
- Upper Band: Middle Band + 2σ.
- Lower Band: Middle Band - 2σ.
Here, σ represents the standard deviation of the price over the past 20 days.
Practical Significance
Touching the Upper Band
When the price touches the upper band, it indicates a short-term high. Possible outcomes include:
- Pullback: In a ranging (sideways) market.
- Breakout: Riding along the band in a trending market.
Touching the Lower Band
When the price touches the lower band, it indicates a short-term low. Possible outcomes include:
- Rebound: In a ranging market.
- Continued Drop: Riding along the band in a downtrend.
Middle Band
The middle band acts as the center of the trend. Prices above the middle band indicate strength, while prices below it indicate weakness.
Usage in Two Market Conditions
1. Ranging Market
Bollinger Bandwidth remains stable. Sell when the price touches the upper band and buy when it touches the lower band. This is Mean Reversion Trading.
2. Trending Market
Bollinger Bands expand rapidly. The price may run along a single band for an extended period. This is Trend-Following Trading.
How to distinguish between ranging and trending markets using bandwidth:
- Narrowing Bandwidth: Ranging market or an imminent breakout.
- Rapid Expansion: A trend has been established.
Bollinger Band Squeeze
When the bandwidth reaches a historical low, it is known as a "squeeze," indicating an imminent breakout. However, the direction remains uncertain.
Action:
- Wait for a clear breakout direction before entering.
- Do not attempt to guess the direction in advance.
Bollinger Band Expansion
The bandwidth shifts from narrow to wide, indicating that a breakout has occurred.
Outcomes:
- Upside Breakout: Indicates an uptrend.
- Downside Breakout: Indicates a downtrend.
Inside vs. Outside the Bands
- Inside the Bands: Normal state, covering about 95% of the time.
- Outside the Upper Band: Extreme bullishness.
- Outside the Lower Band: Extreme bearishness.
Prices that move outside the bands usually return quickly. A truly strong trend will repeatedly "hug" the upper or lower band.
Combinations with Other Indicators
BOLL + RSI
- Upper Band Touch + RSI > 70: Strong sell signal (in ranging markets).
- Lower Band Touch + RSI < 30: Strong buy signal.
BOLL + MACD
- Upper Band + MACD Death Cross: Sell signal.
- Lower Band + MACD Golden Cross: Buy signal.
BOLL + Trendlines
If the price climbs along the upper band and the uptrend line remains intact, continue holding long positions.
Parameter Adjustments
Default settings are (20, 2). These can be modified:
- Short-term: (10, 1.5) for higher sensitivity.
- Long-term: (50, 2.5) for more stability.
The 20 + 2σ setting is the classic default used by the majority of traders.
Practical Example
In a BTC 5-minute K-line chart during a sideways range:
- Touch Lower Band + RSI 25: Buy.
- Price reaches Middle Band: Take 50% profit.
- Price reaches Upper Band + RSI 70: Close the entire position.
- Repeat the process.
However, once the price strongly breaks above the upper band (bandwidth expands), switch to trend mode:
- Stop selling just because the price touches the upper band.
- Wait for a pullback to the middle band + volume confirmation to add to the position.
- Hold until the price breaks below the middle band to take full profit.
Limitations of Bollinger Bands
1. Lagging Nature
The 20-day SMA is a lagging indicator. Bollinger Bands may react slowly during extreme market moves.
2. False Breakouts
The price may briefly exit the bands and immediately return, resulting in losses for breakout traders.
3. Bandwidth Cycles
Bollinger Bands provide fewer signals during the squeeze phase and dense signals during expansion. They must be used according to the specific phase.
Bollinger Bands + Price Action
If the price repeatedly tests the upper or lower bands without breaking through, it may form a Double Top or Double Bottom pattern. In technical analysis, these "test + failure" events are strong reversal signals.
Two Sides of Trading
Long Positions
- Ranging Market: Touch lower band + bullish reversal candlestick → Buy.
- Trending Market: Breakout above upper band + retest of middle band → Add to position.
Short Positions
- Ranging Market: Touch upper band + bearish candlestick → Sell.
- Trending Market: Breakout below lower band + retracement to middle band → Add to short.
FAQ
Q: Can Bollinger Bands completely replace RSI or MACD? A: No. They are complementary. BOLL shows relative price position, while RSI and MACD measure momentum.
Q: Are Bollinger Bands suitable for long-term trading? A: Yes. You can adjust the settings to (50, 2) for weekly or monthly charts.
Q: Is it still valid if the price returns inside the bands after a breakout? A: Yes, that is normal. Repeated breakouts are a sign of true strength.
Q: Can I change σ to 3? A: Yes, but the bands will be wider, resulting in fewer signals. 2σ is the industry balance.
Q: Which is better, Bollinger Bands or KDJ? A: BOLL identifies channels, while KDJ looks at momentum. They serve different purposes.
Further Reading
Bollinger Bands are powerful tools for identifying both ranges and trends. With a few days of practice, you will develop a much better sense of market rhythm.