Bollinger Bands and Fibonacci Retracements
Market trading is not just sitting and guessing market moves or picking random times to open and cancel trades. It necessitates a significant portion of your logical reasoning, also with the assistance of tools that utilize various marketing strategies. If you’re a trader or investor, the Bollinger bands and Fibonacci retracements are excellent marketing tools to consider.
The Bollinger bands can help you determine if an asset is overbought or oversold. The Fibonacci retracement, on the other hand, aids in the placement of entry orders, the determination of stop-loss levels, and the establishment of price goals. These tools are especially important for beginner traders, but even experienced traders rely on them.
However, using these two tools can be of great benefit to you if you aim to minimize the risk present in online investment trading. But what exactly are the Bollinger bands and the Fibonacci retracements?
What is a Bollinger Band?
Bollinger bands can be used to evaluate if prices are relatively high or low. A series of trendlines displaying two standard deviations out from a simple moving average of a security’s price defines it as a technical analysis tool. It employs a formulaic way to create statistical charts that depict the pricing and volatility of a financial instrument or commodity over time.
With this formula, you will get financial assistance in making trading decisions, controlling automated trading systems, and doing high-quality technical analyses of trades. You can use them in pairs with upper and lower bands as well as a moving average. Furthermore, while the pair of bands aren’t meant to be used alone, you can include signals from other indicators.
What are Fibonacci Retracements?
Fibonacci retracement is a technical analysis term used by both active and long-term traders to refer to support or resistance zones. It can be used to make entry orders, define price goals, and determine stop-loss levels. Fibonacci Retracements are ratios discovered in the Fibonacci sequence that are used to indicate probable reversal levels.
Again, Fibonacci retracement levels, unlike moving averages, are fixed prices that do not change. Because of the consistency of the pricing levels, they can be identified quickly and clearly.
You can use Fibonacci retracements to create support lines, determine resistance levels, place stop-loss orders, and set target prices. When price levels are challenged, this aids traders and investors in anticipating and reacting intelligently.
How the Bollinger Bands and Fibonacci Retracements are Calculated
Before you start the Bolinger calculation, you will;
- Calculate the simple moving average of the security, which is usually a 20-day SMA.
- Calculate the standard deviation across the same number of periods as the simple moving average.
The upper band can then be calculated by multiplying the moving average by the standard deviation. For the lower band, subtract the standard deviation from the moving average.
If you summarize these processes into a mathematical formula, it becomes;
For the upper Bolinger band:
Downward Bolinger band:
NP(normal price) = (High+Low+Close)÷3
n=Number of days in smoothing period (normally 20)
m=Number of standard deviations (normally 2)
σ[NP,n]=Standard Deviation over last n periods of NP
You don’t have to do much mathematical analysis to get the Fibonacci retracement. But you will need to remember these three Fibonacci retracement levels: 0.382 or 38.2%, 0.500 (50%), and 0.618 (61.8%).
Now with the Fibonacci sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144. By using one of the key Fibonacci ratios, you may calculate a Fibonacci retracement by multiplying the vertical distance between two extreme high and low points on the stock chart of any asset (23.6, 38.2, or 61.8).
Trading is very risky because it is involved with your capital. So while you trade at your own risk, it is crucial to include all necessary tools that can help you manage these risks to the best bare minimum.
Some links that may help you
Take a look at our free Financial Risk Calculator to find out what styles of savings and investments may suit you.