Lesson 3

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This article teaches you how to use the three lines of Bollinger Bands (upper band, middle band, lower band) to judge market trends and find trading opportunities. It also explains how to avoid pitfalls and manage risks. The content can be divided into these sections:

First, understand the “basic gameplay” of Bollinger Bands: invented by John Bollinger in 1983, it consists of three lines — the middle band is the 20-day moving average, the upper band is the middle band plus 2 times the standard deviation, and the lower band is the middle band minus 2 times the standard deviation. The channel formed by these lines indicates the magnitude of price fluctuations: the wider the channel, the more intense the price swings; the narrower the channel, the more likely a trend reversal (78% of the time, narrow channels precede big moves). The middle band acts as a “trend boundary”: if the price deviates too far from it, it’s likely to revert back.

How to interpret “buy and sell signals”:

Trend signals: When the price breaks through the middle band with increased volume (more than the 20-day average volume), and three consecutive K-lines stay above the middle band, it’s a reliable bullish signal; conversely, breaking below the middle band indicates a bearish trend.

Reversal signals: When the upper and lower bands are very close (contracted by more than 20%), like “squeezed” together, it suggests an upcoming breakout — either a volume-driven rise above the upper band or a fall below the lower band. These indicate potential trend changes, but don’t rush to act on the first breakout; 30% of these may be false signals. Wait for the close confirmation for more reliability.

Overbought and oversold signals: When the price exceeds the upper band, it indicates “overbought” conditions, suggesting it might be time to sell some holdings; when it drops below the lower band, it indicates “oversold,” and you might consider buying a little more. Additionally, if the price stays outside the bands for more than 4 candles, there’s a 68% chance it will revert to the middle band, suitable for short-term profit-taking.

How to use different trading timeframes:

Short-term (intraday trading): Use 15-minute and 1-hour charts for entry points, with the 4-hour chart to determine the overall trend. Set a 2% stop-loss and a 3% take-profit; don’t be greedy.

Mid-term (swing trading): Use 4-hour and daily charts, referencing the weekly middle band to decide whether to buy or sell. If the upper and lower bands are expanding at more than 45°, the trend is strong, and you can hold longer.

Long-term: Use weekly and monthly charts. When all three lines are trending upward, consider a firm buy, holding for over 3 months. If the channel width on the monthly chart breaks the three-year high or low, it could signal a market top or bottom, suitable for phased position building.

Don’t rely solely on Bollinger Bands; combine with other indicators: using RSI, MACD, and volume together helps avoid pitfalls. For example, if the price hits a new high but RSI doesn’t, it’s a “hidden divergence” and may signal a top. When MACD shows a bullish crossover (buy signal) and the price breaks above the middle band simultaneously, the upward move is more reliable. Also, volume during breakouts should be at least twice the 30-day average; otherwise, it might be a false breakout.

Risk management is crucial:

Stop-loss and take-profit: After buying, if the price falls below the middle band, sell quickly — don’t hold through losses. After selling, if the price rises above the middle band, cut losses and exit. You can also sell in stages: for example, sell 30% when the price hits the opposite band, then sell another 40% on a pullback to the middle band.

Leverage use: When the price breaks the bands, reduce leverage; when the channel narrows, you can slightly increase it. The larger the leverage, the stricter the stop-loss should be. For example, with 5x leverage, accept a maximum loss of 1%; with 20x leverage, only 0.25%. Never risk more than 5% of your total capital on a single trade.

Avoid false breakouts: For short-term signals (like 15-minute charts), always check the longer-term trend (like 4-hour charts). If the price hits a new high but the channel doesn’t widen or volume doesn’t increase, it might be a false breakout — don’t follow blindly.

How to handle special situations:

Extreme market conditions (e.g., sharp price surges or drops): Increase the channel width parameter from 2x to 3x to prevent frequent false signals. If the channel suddenly widens more than 3x within 24 hours, be alert for black swan events and reduce leverage immediately.

Range-bound or choppy markets: Adjust the middle band period to 10 days for more sensitivity. If the price fluctuation is 20% less than the channel width and volume isn’t confirming, stay out of the market and wait.

Black swan warnings: If the channels of major coins and Bitcoin expand abnormally at the same time and are highly correlated, it could indicate systemic risk. Prepare hedging strategies in advance.