A Fine Sommelier Explanation of Bollinger Bands With Kevin Kennis

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A Fine Sommelier Explanation of Bollinger Bands With Kevin Kennis

In order to make the most out of our experience as participants in the DeFi market, Pairings by Sommelier has taken yet another step into facilitating the user experience for Liquidity Providers with the addition of one of the most popular tools for market reading: Bollinger Bands.

What are Bollinger Bands?

This is a signaling tool that helps us read the variations of the prices of a token or digital assets over time, allowing us to measure its trends and volatility. These signals are presented as bands and are shown in contrast by having one depicted above (upper band) and one below (lower band), letting the trader read the pattern of the market, determining if it’s movements are either large or small.

Bollinger Bands with Kevin Kennis

How are Bollinger Bands being included in Sommelier’s service?

Sommelier uses an algorithm based on Bollinger Bands to suggest optimal liquidity ranges for an LP in a Uniswap V3 pool. Due to the formula behind Bollinger Bands, they adapt to a coin's volatility and regular price movements. So, more volatile coins will have a wider range, and more stable coins will have a more narrow range. This means that Bollinger Bands can form the basis for a safe liquidity range on a wide variety of pools. You can see our Suggested Liquidity Ranges in Sommelier's Pairings App.

How can Bollinger Bands improve the user experience for Liquidity Providers?

Bollinger Bands give the liquidity provider an easy-to-understand method for where to place the lower and upper bound for their liquidity. Choosing the best ranges on one's own can be a complex, time-consuming, and risky process. Liquidity Providers can also adjust the suggested ranges based on their own market opinions by choosing a Market Sentiment (bullish/bearish/neutral), or editing the ranges themselves.

A Quick glossary for Bollinger Bands

What is a Standard Deviation?

Both upper and lower bands are defined as what we call Standard Deviations, which simply means that these are lines that show price variations away or nearer from the expected norm or moving average. This way, we get to see the movements of the market in either direction.

What is a Moving Average?

A moving average is an indicator of price movement that filters short-term variations in a certain market and identifies its trends. This works by the calculation of a data set of a series of average prices, showing if the value of a certain market is rising or devaluing.

What is Volatility?

Volatility is the measure of inconsistencies or big changes in the price of a certain market over a sustained period of time.

What is an Underlying Price?

An underlying price is the current market value of a certain asset.