A sophisticated crypto enthusiast must be aware of the overall landscape present within the digital asset market. The general trading universe is huge with wide swaths of information and concepts that include aspects such as exponential moving averages, daily moving averages, profit/loss, and Bollinger Bands.
We want to focus on Bollinger Bands and understand how they relate to the general cryptocurrency, digital asset market and bot trading. But first, here is a little history lesson on Bollinger Bands, where it came from and why it matters.
Those who are interested in learning about Bollinger Bands should understand the history as it would help to provide more insight into why this can be a useful concept for cryptocurrency speculation.
This concept was brought about by John Bollinger before the nineties. It is an insightful technique because it will assess the volatility embedded in the price through the lens of variance between several bands, the top band and bottom band, against the moving average.
The top band and the bottom band will compress when there’s little changes in the price over a particular period. Conversely, if there’s substantial volatility the lines will expand and form a distance between each other to portray vast volatility. Traders use this specific concept and will integrate it into their stratagems.
Remember that the bottom band will indicate a potential buying opportunity. Speculators believe that if the price breaks through the bottom, the price should inch up and get to a spectacular level. Conversely, if there’s activity around the top band it may indicate a selling opportunity.
Bollinger bands are a great component of an overall trading analysis regimen, let’s find out more about this strategy.
How to Use Bollinger Bands in Automated Trading World
All types of cryptocurrency enthusiasts who dabble in the markets regularly realize that their job is to time the market. Now, as everyone knows, timing the market is not easy in the least, it takes great analysis and study of the market.
The questions you want to ask in this regard is when do I enter the market, when do I get out of the market? The more you are right in making these difficult decisions, the more volatility will work in your favor.
What kind of tools should you turn to as a part of this process? We know that technical trading tools are beneficial in helping to understand volatility. These tools can improve the process and help individuals to spot favorable market trends and golden opportunities. But these tools and techniques, like the Bollinger Band concept, are useless unless you know how to integrate it into your trading process.
TOP TRADING BOTS
What You Need to Know about Bollinger Bands
First, realize that Bollinger Bands are technical analysis that are a part of a larger technical analysis technique that propels traders to get unique insights into the market and position themselves to gain from the markets.
Speculators will use the Bollinger Band like so; view the moving average price of an asset, plot the pattern with a specific line, then overlay a top line and a lower line and distance them in two standard deviations.
As you can see, there are three lines and they all indicate price action in some form or fashion. These lines will occur over 20 periods and they may be measured from an hourly or daily standpoint. For example, the periods can be something that measures 20 hours within a day or 20 days within a month.
One would use the hourly chart to assess the short term price action and the daily one to assess more longer horizon approaches. People will choose to adjust the deviations based on the length of distance between the periods present in the chart.
The foundation for Bollinger Bands is that they can the essence of the market from a price standpoint. Is the asset expensive right now indicating a sell opportunity or is very cheap, indicating a buying opportunity?
This technique helps individuals see the contraction and expansion of the assets and make purchasing decisions accordingly. The closer that Bitcoin price or another asset is to the top line, the more likely it is that one should sell the asset. The closer that the Bitcoin price is to the lower line, the more likely it is that you want to buy it.
While it was founded in the late 1990’s, people still use it to this day because it is rooted in mathematics and serves traders well in various markets. What is unique about this concept is that it allows you to track volatility, helping you understand current patterns and potential favorable moments.
Use Bollinger Bands in Your Trading
The cryptocurrency market is volatile, that’s a good thing and a bad thing. It is a wonderful market to be in if you understand how to get in and get out at the right times, especially if you actively manage your digital assets.
As you pursue this active trading approach, you must look at the Bollinger Band and understand simple ideas such as the squeeze.
What is the squeeze?
The Bollinger Band squeeze is when the top line and the bottom line are nearer together. The closer they are, the more volatility that is likely present within the market. If you’re a genuine trader, increased volatility means potential chances for more gain. When these bands stretch and go further away from each other, one will likely notice decreased volatility, making it more likely that you might want to get out of the market.
Remember we talked about the middle line that shows Bitcoin or other asset price action? When that line pushes past the top line or it sinks pasts the bottom line we are seeing a breakout. A significant portion of price action takes place between the top line and bottom line, so when the middle line moves past either line, then something big is happening.
But remember that it does not have to indicate that one should make a trade here. Many people believe that because it broke out that it requires action on their part, that might not be the case.
The more specific reason why you would turn to Bollinger Bands is that you want to understand how robust the trend is going to be. The reason why you want to make sure that it is a strong trend is because you don’t want to deploy capital, only to have the trend go against you, very hard.
You can measure that a trend is more robust when the asset price line has more proximity to the top line. As such, if it goes away from the top band, that means that action is dying down. For instance, if the price of Bitcoin is going up and the line is close to the top line then for a while, then that means that there might be some opportunity.
This concept is essential in robotic cryptocurrency speculation. Speculators can look at different automated tools that are designed in such a fashion that they will read and execute actions based on concepts such as Bollinger Bands.
Bollinger Band Percent Bandwidth and Bollinger Bands W Bottom
Bollinger Bands will have strong association with Bollinger Band Percent Bandwidth and Bollinger Band W Bottom.
Let’s look at what these concepts are and how they relate to the Bollinger Band theme.
The percentage bandwidth component details quantitatively the position of the price to either band. For instance:
- A percentage bandwidth above 1 would indicate that the price is over the upper band
- A percentage bandwidth that is on par with 1 would indicate that the price is in line with the band
- A percentage bandwidth that is at .50% would indicate that the price is over the middle band or the asset price line
- A percentage bandwidth that is below .50% would indicate that the price is below the middle band or the asset price line
- A percentage bandwidth on par with zero means that it in line with bottom line
- When it is sub zero then it indicates that the price is under the bottom line
You can see how that % bandwidth helps you to clarify the picture at hand, right? One can use this tactic and realize current patterns and signals.
The next component here is that of the double bottom. These double bottom indicators can help traders realize when a price decrease is taking place. The idea here is to check and see that the value is hovering over the lower band. If you notice this W bottom situation in your automated trading, you might be more enthused to buy an asset after the second bottom.
Here’s What You Need to Know about the M Top Component
What is the M Top? It is a formation that is part of the Bollinger Band strategy. This event takes place when traders bid up the price to a new high and then declines and again goes up to another high.
If you picture that in your mind, you will see the price going up, then down, then up and having that pattern, showing an M pattern. Bollinger bands let traders realize if an asset is going to go up or if it will see some further decline.
Traders want to see the second price appreciation rise to touch the upper line, if they see that they will be more confident in buying. If they don’t, they may want to sell. If you can understand W bottoms and M tops, you can realize more growth and value creation.
But you need to see how you can do so for automation.
Optimize Bollinger Tactics for Bot Automation
How do you optimize for automation?
There are several ways to optimize a Bollinger Band tactic for trading bot actions. These processes require complex parameters, stop losses when purchasing assets at a specific price point, and input more refinement.
The most simple optimization you can do is to refine parameters in a way that makes the most sense for you. Now, let’s talk about refining these parameters.
But before we do, we must realize that not all bots have stop functions, as such, you must utilize a cryptocurrency facilitation hub that does have a stop function or choose an application that does possess that function.
If you don’t want to go that way you’ll have to make sure you can leave that trade. Risk management is everything in this process.
To Refine a Parameter in the Bollinger Band
Always remember that if you do not have an automaton, choose one that works for you with the right tools and processes. We focus on the SMA, which is our middle line, and the two SMAs refined with standard deviations (top and bottom line) to reach the central notion of our bands.
That is why our first point is to change our parameters that provide our bands.
Our refinement components:
- The timeframe of our middle band or the quantity of candles our SMA is averaged and carried over.
- The timeframe of the standard deviation which is the quantity of the candles that relate to our standard deviation.
- The deviation present within the top line is a positive number that identifies the quantity of standard deviations higher than the SMA/AVERAGE the top line will be.
- The deviation present in the lower band is a negative number that takes into account the variance in the standard deviations lower than the SMA/AVERAGE than the top line will be.
But we are not done yet, we must go a bit further by targeting some basic variables in regard to these parameters. We will begin by going with the general 1.5 +/- standard deviation instead of the general 2 to provide us with more purchase and divestment signals. But in most situations we may use the typical 20 period SMA for our middle line.
That means you will have some variation of window mean, window STD, an STD multiple top 1.5, and STD multiple bottom -1.5.
As you apply those parameters you must make sure to process this from a historical fashion.
Backtest the Strategy: Backtesting is a great part of this process. This process is when you test your tactic over a specific timeframe and check out how it would perform. Remember to backtest all of these strategies and tactics for each potential scenario. Backtesting allows you to understand how scenarios play out in the past and give you a picture of how they might work out in the future.
Varied Tactics for Varied Markets: You must account for bear markets and for bull markets. You must think about a design for up markets, for horizontal markets, and for negative markets.
As you adjust parameters and backtest them for different situations, you can see different reactions and results. There is a time when you must cut your losses and that is why you must integrate stop losses when you can.
A Few Bollinger Band Examples
Imagine that you’re looking at a daily candle pattern on Bitcoin and USDC on the cryptocurrency platform CEX.io. Now, imagine you purchased the asset every time the price reached the bottom band and sold when it hit the top band.
You will notice that there are some fantastic plays there, and that the Bollinger Band strategy can work. But it is here that you will also notice the need to add a bit more creativity and detail to automate such a process.
Remember that in some cases, a fantastic time to turn positive and bullish is when the upper line is hit, when the market may sense that such an asset is too risky to buy because of its extremely high price point. A few times, it might be a great idea to be negative and bet against the asset when it is at a low cost.
You can learn much from John Bollinger and his strategies through different books that teach you about how there’s different ways to interpret the data. The difference that will separate you from the rest of the pack will be regular research and learning on the matter.
The Bollinger Band Summary
Bollinger Bands are a staple technical trading mechanism that many traders use with their automated tools regularly to realize formations and make decisions accordingly. Through this technique you can see if your target asset is at an excessively higher price or if it is a heavily discounted price.
The main point here is that you don’t want to avoid this technique and should instead use the indicator and associated scripts to your advantage. Now that you know what it is, you can find the right tools that help you tap into this option and set it up. As such, you find buy signals and sell signals by yourself.
Many applications allow you to take advantage of this option and offer custom ways for you to modify these price indicators to your liking. The trading automation would pick up signals based on the bollinger band setup and take action regularly.
Pay attention to these points as well as you go about creating your strategies and execute your trades properly.
- Be aware of potential drawdowns that might take place during your strategy. You can have the best strategy in the world but a drawdown in the near term can hinder progress. This is true even if the strategy works over the long term.
- A backtest is great for study purposes but here is a quick word of caution. The past does not predict the future. Be conservative when making bets on market directions.
- Different asset pairs necessitate varied strategies. Create around the behavior of the asset.
- Optimize for multiple strategies to diversify actions so that you can cover yourself for bull and bear markets.
- Pay attention to the general market even when using Bollinger Bands.
- Margin can be your friend with these tactics and strategies.
- There are several types of stops so don’t restrict yourself to just one.
- You can manually purchase an asset and then automate divestments.
Remember to use stops to minimize risks present within the equation if it makes sense, refine strategies and automate them in a cost effective way. Always optimize several parameters that form these bands. It is the nuances where you see the effective plays and can make gains.