Bollinger Bands on eToro. How does it work?

Trading on eToro offers a plethora of assets and markets, along with various technical tools to help you make informed decisions. Bollinger Bands, a popular technical analysis indicator, can provide valuable insights into price volatility and potential trading opportunities. Let’s dive into the world of Bollinger Bands on eToro!

📈 What are Bollinger Bands?

Bollinger Bands is a widely-used technical analysis indicator that helps traders identify overbought and oversold market conditions. Created by John Bollinger, this indicator consists of three trend lines: the upper, lower, and middle bands. The upper and lower bands are drawn two standard deviations (by default) around the middle band, which is a moving average (typically a simple moving average) of an asset’s price.

The bands effectively create a price range, with the distance between them determined by volatility as measured by the standard deviation. A more volatile asset will have wider volatile asset will have narrower bands. Understanding these bands and their relationship with price movements can provide valuable insights for traders.

🔧 Bollinger Bands Settings on eToro

There are four main settings that affect your Bollinger Bands indicator on eToro:

Standard Deviations: This measures the spread of prices relative to their average, with the default set at 2 standard deviations. A higher value results in wider bands, making it less likely for the price to cross them. Have a look at this example below.

Here the coefficient of standard deviations is set to 2.

Here the number of standard deviations is 5; it is immediately obvious that the bands with 5 standard deviations are much wider than the indicator with only 2 standard deviations. The chart almost never crosses the bands.

Period: This value determines the number of candlesticks used to calculate the moving average line (the middle band) in the indicator. The default is a 20-day moving average, which smooths price fluctuations over a 20-day period. A larger period value results in a smoother moving average line, but it may not necessarily provide better trading information.

Moving Average Type: By default, Bollinger Bands use a simple moving average, which assigns equal weight to older and more recent prices. However, you can change this to other types, such as an exponential moving average, which gives more weight to recent prices and may better suit your trading strategy.

Price Field: This setting determines the price data used to construct the indicator, with the default being the daily closing price. You can adjust this to use other price data, such as adjusted closing, open, high, or low prices.

📊 Strategies for Using Bollinger Bands on eToro

1. Squeezes and Breakouts

Bollinger Bands are closely related to price volatility. When volatility is low, the upper and lower bands come closer together, creating a ‘squeeze’ around the middle band. A squeeze can signal an upcoming increase in volatility and potential trading opportunities. Conversely, wider bands indicate higher volatility and may suggest a decrease in volatility in the near future. However, squeezes and breakouts alone are not sufficient to determine the timing or direction of price changes.

Another aspect of Bollinger Bands you need to beware of are breakouts. Many times trader consider the price going through either the upper or lower bands to be a trading signal to open either a buy or a sell position. However, breakouts are not informative of the direction of possible price change or its extent.

2. Price Action

Traders can use Bollinger Bands to gauge the strength of price trends and potential reversals. In a strong uptrend, the price frequently pushes up and reaches the upper band, signaling a potential buy opportunity. Conversely, the price moves closer to the lower band in a strong downtrend, indicating a potential sell opportunity. When the price approaches the upper band, it can be considered overbought, and when it approaches the lower band, it may be seen as oversold.

⚠️ Limitations of Bollinger Bands

While Bollinger Bands can provide valuable insights, they have certain limitations. As a lagging indicator based on a moving average, they react to changes in price trends but cannot predict future price levels. Additionally, during strong upward or downward trends, Bollinger Bands may not provide useful trading signals.

The effectiveness of Bollinger Bands also depends on the settings chosen and their suitability for the specific market or asset being traded. To overcome these limitations, it’s wise to use Bollinger Bands in conjunction with other indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD).

Remember, trading involves potential capital losses as well as gains. It’s crucial to have a solid understanding of trading basics and a well-defined strategy before risking your hard-earned money. Good luck, and enjoy trading on eToro!

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Author & Expert Trader - Financial Analyst :

My name is Bart Bregman and I am a full-time professional trader with nine years of experience. I specialize in shorter-term trading using technical analysis, and I have extensive experience with Stocks, CFDs, Options, and Crypto trading. I believe that there is no such thing as a bad trade. I'm currently traveling the world as a digital nomad trader. You can follow my journey on Instagram at https://www.instagram.com/bart_bregman/