Bollinger Bands

From Traderpedia

An indicator that allows users to compare volatility and relative price levels over a period of time.

This indicator was devised by John Bollinger.

The Bollinger Bands are envelopes based on a moving average and a standard deviation which makes the bands widen or narrow relative to the current market volatility.

95% of price action will take place within the Bollinger bands and thus the Bands act as strong areas of support and resistance when the market is without trend. It is possible at times like this to successfully trade the price rising or falling from one Bollinger line to the other.

When a trend begins and the volatility of the market increases thus the spacing of the Bollinger Bands will widen, as the trend slows down the Bollinger bands will narrow.

[edit] Calculation

Bollinger Bands consist of a central line and two outer bands - one higher and one lower -which will encompass the majority of any price action.

The middle line is a simple moving average

The upper band is the SMA plus 2 standard deviations

The lower band is the SMA minus 2 standard deviations

The standard deviation mentioned above is a statistical term that relates to price volatility and ensures that the bands react quickly to price movements.