Here's a comprehensive guide on how to use the three lines of Bollinger Bands (upper, middle, lower) to analyze market trends, identify buy and sell opportunities, and avoid pitfalls and manage risks. The content can be divided into the following sections:

Understand the “Basic Usage” of Bollinger Bands: Developed by John Bollinger in 1983, it revolves around 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: wider channels suggest stronger price swings; narrower channels indicate potential trend reversals (78% of the time, narrow channels precede significant market moves). The middle band acts as a “trend boundary”: if the price deviates too far from the middle band, it’s likely to revert back.

How to interpret “Buy and Sell Signals”:

Trend Signals: When the price breaks through the middle band accompanied by increased volume (more than the 20-day average), and three consecutive candles 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 being “squeezed together,” it signals potential upcoming volatility. The price may break out above the upper band with increased volume or fall below the lower band, indicating a possible trend reversal. However, don’t rush to buy or sell 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 a partial profit-taking or caution; when the price drops below the lower band, it indicates “oversold,” and you might consider buying cautiously. If the price stays outside the bands for more than 4 candles, there’s a 68% probability it will revert toward the middle band, suitable for short-term profit-taking.

How to use different trading cycles:

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 stop-loss at 2% and take-profit at 3%, avoid greed.

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°, it indicates a strong trend, allowing for a longer holding period.

Long-term: Use weekly and monthly charts. When all three lines are trending upward, consider a firm buy-and-hold strategy for over 3 months. If the channel width on the monthly chart exceeds the maximum of the past three years, 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 is essential. For example, if the price hits a new high but RSI doesn’t, it’s a “bearish divergence” and may signal a top. A bullish MACD crossover (buy signal) combined with the price breaking above the middle band 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 paramount:

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, consider stopping out. You can also sell in stages, e.g., sell 30% when hitting the opposite band, then sell another 40% on a pullback to the middle band.

Leverage usage: When the price breaks the bands, reduce leverage; when the channel is narrow, you can slightly increase leverage. 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 the trend blindly.

Handling special situations:

Extreme market conditions (e.g., rapid price surges or crashes): Increase the channel multiplier 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 fluctuates within 20% of the channel width and volume is low, consider staying out of the market and avoid unnecessary trades.

Black Swan Warnings: If major cryptocurrencies and Bitcoin’s channels expand abnormally at the same time with high correlation, it could indicate systemic risk. Prepare hedging strategies in advance.