It is recommended to use period Simple Moving Average as the middle line, and plot top and bottom lines two standard deviations away from it.
When price is "Walking the Bands" these breakthroughs are not actual reversal signals. Price may indeed reverse somewhat but it often turns once again and resumes the overall trend. Identifying when a Breakthrough signifies an actual trend reversal can be a difficult event pinpoint. This is mostly done through historical technical analysis and research. Trading Signals can also be found using the same principles. Opportunities to trade with the trend can present themselves when Breakthroughs occur in the opposite direction of the underlying trend.
Instead of relying on the appearance of prices in relation to the Bands, technical analysts can use exact values to help make more informed decisions. During a well-defined trend, breaks above 1 and below 0 become much more significant. Can toggle the visibility of a line indicating overbought levels. Can toggle the visibility of a line indicating oversold levels. Sets the number of decimal places to be left on the indicator's value before rounding up. While these signals were good for trend identification, traders would likely have had issues with the risk-reward ratio after such big moves.
Traders might consider using this method to identify the trend and then look for appropriate overbought or oversold levels for better entry points.
Surges towards the upper band show strength, but can sometimes be interpreted as overbought. Plunges to the lower band show weakness, but can sometimes be interpreted as oversold. A lot depends on the underlying trend and other indicators. Click here for a live chart. The default parameters 20,2 are based on the default parameters for Bollinger Bands.