Bollinger Bands: measuring how stretched a move is
Caliente Signals · Updated
Bollinger Bands are a moving average with a volatility envelope round it. The middle band is a 20-candle SMA. The other two sit two standard deviations above and below it.
Standard deviation measures how spread out those twenty closes have been, so the envelope sizes itself. A volatile market widens the bands. A quiet one squeezes them together.
Each band is its own operand, so a condition reads price crosses below the lower Bollinger Band(20). The period is editable. The two deviations are not.
A band touch is not a reversal
Price at the upper band is stretched against its own recent range. That is all the band reports, and it is not the same as expensive.
In a strong trend, price walks along the upper band for days at a time. A rule that sells every touch sells the whole move on the first day of it.
There is a statistical rule of thumb attached to two standard deviations, that roughly 95% of observations fall inside them. It holds for data spread out in the familiar bell-curve shape. Crypto prices are not spread that way: violent moves show up far more often than the bell curve allows for, so band touches are more common than the 95% figure suggests, and they cluster in exactly the conditions where a band-touch rule is least reliable.
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