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Bollinger Bands

Introduction

A band plotted two standard deviations away from a simple moving average. It was developed by famous technical trader John Bollinger.

Standard deviation is a measure of volatility, Bollinger Bands adjust themselves to the market conditions. Bands are widen when market is more volatile, and bands contract during less volatile periods. The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.

This is one of the most popular technical analysis techniques. If prices move closer to upper band, market is in overbought condition, and if prices move closer to lower band, market is on oversold condition.

Formula

            

*Bollinger bands are formed by three lines. The middle line (ML) is a usual Moving Average

ML = SUM[CLOSE, N]/N *The top line, TL, is the same as the middle line a certain number of standard deviations (D) higher than the ML. TL = ML+(D*StdDev) *The bottom line (BL) is the middle line shifted down by the same number of standard deviations. BL = ML-(D*StdDev)

Advantage

As such, they can be used to determine if prices are relatively high or low. According to Bollinger, the bands should contain 88-89% of price action, which makes a move outside the bands significant.

Sample Calculation

Technical chart for Bollinger Bands

Technical Indicators

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