🧧🔍 Basic Principles of Bollinger Bands: The Price's 'Safety Barrier'
• Composition: Composed of three lines
◦ Middle Band: 20-day moving average, serves as the 'spine' of the price, reflecting the medium-term trend.
◦ Upper Band: Middle Band + 2 times the standard deviation.
◦ Lower Band: Middle Band - 2 times the standard deviation.
• Core Logic: Approximately 95% of the time, the price will fluctuate between the upper and lower bands; when the price touches or breaks through the bands, it often signals a trend reversal or acceleration.
• Channel 'Breathing': The width of the Bollinger Bands is determined by market volatility. When volatility is low, the channel contracts (calm period); when volatility is high, the channel expands (active period).
🎯 Practical Signals and Operational Strategies
1. Extreme Reversal: Touching the 'Red Line' will cause a reversal
◦ When the price breaks through the upper band, it issues an overbought warning, indicating that the short-term increase is too large, and the price is likely to return to the middle band (downward adjustment).
◦ Similarly, when the price breaks below the lower band, it is an oversold signal, suggesting that the price may rebound.
◦ This is a typical manifestation of mean reversion and serves as a warning for short-term tops/bottoms.
2. Go with the Trend: Ride the 'Waves of the Trend'
◦ If the price continues to run near the lower band, it indicates a very strong downward trend; at this time, do not easily attempt to catch the bottom, but rather short the trend.
◦ Conversely, when the price runs near the upper band, the upward trend is strong, making it suitable to go long with the trend.
3. Key Signal: 'Contraction' Before the Storm
◦ When the Bollinger Bands have been contracting for an extended period (a 'contraction'), it is like a tightly compressed spring, indicating that the market is about to change direction, and a significant one-sided market (sharp rise or fall) is likely to occur.
◦ This is a turning point from low to high volatility and an important opportunity to capture major market movements.
💡 Advanced Techniques
