Mastering Steem Market Volatility Using Bollinger Bands

besticofinder (76)in SteemitCryptoAcademy • 19 days ago (edited)

Mastering Steem Market Volatility Using Bollinger Bands

Hello friends,

I'm writing an article to steemit crypto academic after years since I was really busy with my real life. But again I thought to start writing my old friend @kouba01 's lesson this week. I found this topic really interesting as I was somewhat in to trading few years back. Okay, now let's take a look at how to master steem market volatility using " Bollinger Bands".

Measuring the market volatility is very important for traders to understand how the market behaves. This is common for any type of market, not only for cryptocurrencies. Bollinger Bands were found in 1980's ( long time ago ) by a financial expert John Bollinger. This tool is basically designed to help traders to understand the overbought and oversold conditions of the market. As @kouba01 has explained in the lesson, this is a concept based on three lines , simple moving average and two standard deviation lines. Now let's get back to the lesson,

Question 1: Explain the Components of Bollinger Bands

As I mentioned above, Bollinger Bands consists of three major components ( 3 bands ) which can be named as middle band, upper band and lower band.

Okay, now let's look deep in to each of the band.

Middle Band

Middle band basically indicates the simple moving average ( SMA), which is the average value of the market of a certain period of time. We can also calculate and double check it as follows.

Let's calculate SMA for 10 days ,

Simple Moving Average = ( Sum of market closing price for the selected 10 days ) / 10

It's not complex , the trader can select the period of time as he proffering ( 20 days , 10 days, 5 days etc. )

Upper Band and Lower Band

We can identify the overbought situations in the market using the behaviour of this upper band. To understand how this band behaves, we need to understand the term "Standard Deviation", we need little bit of math's for this part. Standard deviation is an indicator, how much is the difference of the value from the average value. This deviation can be both positive and negative. Now let's look at how it's calculated.

Upper Band=Middle Band (SMA)+(Standard Deviation×N)

Lower Band=Middle Band (SMA)−(Standard Deviation×N)

N is a constant multiplier, generally we set the value 2. So now I think you have a clear idea how middle band, lower band and upper band is calculated. It's very simple, but these three components are very good indicator to understand the market volatility.

Question 2: Analyzing Market Conditions with Bollinger Bands

Now let's take a loot at how the steem/ USDT market can be avalized using Bollinger Bands. When the market value is close to lower band, that indicates an over sold condition. And when the market value is close to the upper band, it indicates an over bought condition. Now this is the general idea we can get from the Bollinger Bands. But we can further analyse and predict potential corrections or reversals also.

It's very clear in the above image, when the market value touchers the upper band, most of the times the price dropped and when it touches the lower band, the price increased. But as traders we can't take decisions simply like that as we are dealing with real money. One wrong decision can bring you heavy losses.

Question 3: Identifying Volatility Patterns with Bollinger Bands

We can identify the market volatility patterns with Bollinger Bands very easily. First let's check how to identify whether it's volatile or not.

It's simple, when the bands expand as in the above figure, the market is volatile. The bands are expanding as the standard deviation is increased. So according to the equation I mentioned above the values of lower and upper bands are increasing. And when the market is less volatile, there is not much gap between the two lower and upper bands as the standard deviation of the market value and the simple moving average is low.

You can see when the steem value is trading near the upper band above and that means it's over bought, where we can guess the price will fall. If the opposite happens , it's also true, that means when the price is trading in lower band, it's indicating a potential price increase.

Question 4: Developing a Trading Strategy with Bollinger Bands

To create a trading strategy using Bollinger Bands , we need to setup specific entry rules and exit rules to the market considering the behaviour of Bollinger Bands. Basically we have to focus on market price touchpoint with the bands, and band squeezes, and also crossings through middle band. We have two options, we can try reversal trades ( selling steem when the steem price touch the lower band and buy steem when steem price touch the upper band) or breakout trades ( entering / existing the market depending on price break the upper or lower bands) . Let's search for an example from Steem/USDT market. I will explain a strategy based on reversal entry.

When the steem price drop below or touch the lower band and when it bounce back again ( this is important) , this indicates a steem oversold condition. We if it bounces back after touching the lower band it is a sign of reversal of value ( A green candlestick ). And again when the price touch the upper band with a reversing candlestick we can identify a overbought condition. So it's the sell signal.

Question 5: Predicting Price Movements with Bollinger Bands

The current price of steem is around 0.1623 $ , middle band value is 0.1669 $ and lower and upper band values are 0.1568$ and 0.1771 $. Current price is in the lower channel, moving more closer to the lower band. And the lower band value is also a much lower value of 0.1568$. So the near support is low at 0.1568$ . Hopefully if the price bounce up, we can consider the middle band value as the next resistance and another resistance at the upper band. As we can see the Bollinger Bands are squeezing we can expect a possible breakthrough very soon.

I like to invite : @vishwara @pushpika and @nishadi89 to join the contest

-Vimukthi Vithanage

About The Author :

_{Vimukkthi Vithanage (@besticofinder) is an Electrical Engineer and a Lecturer by profession , crypto enthusiast and a person who always values his freedom. He loves traveling , teaching and to spend time with his friends. A good reader and a good listener. He currently works in Faculty of Technology , University of Sabaragamuwa , Sri Lanka and also as a freelance SEO service provider. He writes on different topics related to his daily activities. If you like his writings , don't forget to show your love with an upvote and leave a feedback to show more love. And a resteem will be a great encouragement for his work. Feel free to contact him on discord anytime . He always love to make new friends.}