Bollinger bands with EMAs

 

Bollinger Bands are a technical analysis tool created by John Bollinger in the 1980s, which helps to indicate when an asset’s price is overbought or oversold.

 

The bands indicate where prices may find support or resistance as they fluctuate back and forth (often leading to explosive moves) around the trend line.

How do Bollinger bands work?

Bollinger Bands consist of three lines:

  • Upper
  • Lower
  • 20-period simple moving average

 

The middle line is the simple moving average; it becomes the bands’ centre line after being smoothed out with two standard deviations on either side (usually 2).

 

The creation of the initial 20-day SMA of closing prices forms the basis of Bollinger bands. The 20-day SMA is called the ‘middle line’ or ‘trendline’.

 

One deviation from the trend line is calculated by adding and subtracting a multiple of standard deviation (usually 2). The upper band equals an addition of two times the standard deviation, while the lower band equals a deduction of two times the standard deviation from the middle line.

 

The use of Bollinger Bands in trading tells you when a market has been overbought or oversold.

 

A market becomes overbought when prices rise too high above their moving averages, indicating that it may be time for stocks to cool off and return closer to equilibrium.

 

It becomes an oversold order for prices to drop below their moving averages, indicating that it may be time for the market to continue moving up.

 

There are two ways to use Bollinger Bands:

Normal Mode

The normal mode is to look at the bands themselves, noting when they have become ‘stretched’. Expect a reversion toward or through the middle line’s 20-day SMA when this happens.

 

For example, if prices are well above both the upper and lower bands, one can expect them to drop closer to their 20-day SMA eventually.

 

If prices are trading between the band lines with only minimal room to go before hitting each line (or touching them), then one can expect minor price moves back in either direction (towards or away from each band).

 

The more the bands are ‘stretched’, the stronger the move is expected to be.

Filter Mode

Filter mode requires a simple calculation: take a 20-day EMA of closing price, add it to the middle line and then subtract it from each band.

 

This calculation can significantly affect how responsive Bollinger Bands with EMAs are to price fluctuations by making them faster or slower to respond depending on where they lie about their middle line.

 

If prices lie below their middle line, this means that there is room for prices to drop further before reaching equilibrium, and thus less responsiveness (slower filters) will only send signals when prices reach much lower levels.

 

If prices hover above their middle lines, this means that there is little room for them to drop before reaching equilibrium, and thus more responsiveness (faster filters) will send signals when prices only move a little.

 

In turn, this means that the Filter mode will generate different signals from normal mode as it can respond either faster or slower depending on where the market is about its middle line.

How do you use Bollinger Bands with EMAs?

The hybrid band consists of a simple moving average and two standard deviations on either side.

 

In this example, we have used a 20-day SMA as the basis for our simple moving average and set it in place by connecting all of the lows over 20 days.

 

Then, using daily price data, we add multiple standard deviations (2) to each side of our 20-day SMA to plot our inner and outer Bollinger Bands.

 

The Bollinger Band Indicator in MetaTrader 4 is an enveloping indicator created by John Bollinger; it plots two standard deviation envelopes representing high and low price ranges.

 

Depending on volatility, the bands expand when prices move higher or lower than the average (middle line) and contract when they return to the middle line.

 

It can be interpreted as a buy or sell signal when this occurs.

 

Other tools can be included in Bollinger Bands, such as Keltner Channels. These additional tools can help indicate whether a market is getting too hot and may soon revert toward its mean price level.

 

Bollinger Bands with EMAs is an advanced technical analysis tool that helps technicians identify potential areas of support and resistance for asset prices.

 

Before utilising this type of charting method, basic knowledge of how Bollinger bands work is needed.

 

Because they measure deviation, Bollinger bands using EMAs apply to all periods ranging from short-term to long-term.