One of the most popular indicators among all kinds of traders, Bollinger Bands, invented by John Bollinger in the 1980s, can be used for a number of use cases: monitoring so-called breakouts, defining overbought and oversold positions and as a trend-following tool.
Because we’re swing trading, let’s, first and foremost, spot a trend while using this indicator.
The Bollinger Bands indicator is composed of three lines. Very often the algorithms use a 20-day simple moving average (SMA) for the middle band. To calculate the upper band, they take the 20-day SMA and to that, add the standard deviation of the daily returns of an asset (calculate it here). The lower band is calculated by taking the middle band minus two times the daily standard deviation.
When the price of the asset breaks below the lower band of the Bollinger Bands, prices have perhaps fallen too much and are due to bounce. Time to buy! And vice versa, once the price breaks above the upper band, the market is perhaps overbought and due for a pullback.
Bollinger Bands works on a 5-minute timeframe and searches for entries when the price gets out of bounds either upside or downside from the Bollinger Bands as shown in the screenshot