Volatility and Bollinger Bands

Question 1

Volatility bands

Answer 1

Lines plotted a fixed amount above and below a moving average

Question 2

How do bands respond to market conditions

Answer 2

They don’t respond to changes in market conditions. In active markets, bands are easily broken. In quiet markets, bands are never broken.

Question 3

Bollinger bands

Answer 3

Lines set around the moving average to contain 96% of all price action.

Question 4

How do bollinger bands respond to changes in markets

Answer 4

They expand in volatile markets and contract in calm markets

Question 5

What lines are bollinger bands made up of?

Answer 5

• 20 event simple moving average (SMA)

* upper and lower lines +/- 2 standard deviations

Question 6

What do bollinger bands indicate?

Answer 6

• overbought- at or near the upper hand

* oversold- at or near the lower band

Question 7

When are bollinger bands most popular

Answer 7

For short term trading

Question 8

How should you trade using bollinger bands in a sideways market

Answer 8

Buy when the price touches the lower band and sell when it touches the upper band.

Question 9

The pinch

Answer 9

When the bands narrow to a certain distance. Sharp price changes tend to occur after the bands tighten significantly

Question 10

How can you trade in a bollinger band pinch?

Answer 10

There could be a sharp movement in price so either buy or sell depending on which way you think it’ll go. Put in a stop loss

Question 11

Bollinger band pinch positives

Answer 11

• it is quite reliable

* stop loss can be placed beyond the other band at the same level as the opposite order

Question 12

Negatives of bollinger band pinches

Answer 12

• you need to define the width of the pinch for each asset you trade
• this strategy does not identify a target price

Question 13

Describe how to trade a bullish trend reversal

Answer 13

• wait for a short term low outiside the lower band, followed by a subsequent low made inside the bands
• wait for a candle with a higher low, high and close than the previous candle
• buy at the next candle

Question 14

Describe how to trade a bearish trend reversal

Answer 14

• wait for a short term high outside the upper band, followed by a high made inside the bands
• wait for a candle with a lower low, high and close than the previous candle
• sell at the opening of the next candle