Description
Bollinger bands are a technical analysis indicator that was developed by John Bollinger in the 1980s. Bollinger bands create a standard deviation channel around a moving average of recent prices. Bollinger Bands are displayed as a single moving average line, with two evenly spaced standard deviation lines (one on each side of the moving average line). Bollinger bands are displayed on the same chart as the price bars, and are the yellow and blue lines on the example chart.
Calculation
- Description: Bollinger bands are an upper band (UB) and a lower band (LB) which are a default of two standard deviations (STDEV) of the n most recent prices (Pn), above and below a simple moving average (SMA) of the n most recent prices.
- Calculation:
SMA = (P1 + P2 + P3 + P4 + ... + Pn) / n
UB = SMA + STDEV(P1 ... Pn)
LB = SMA - STDEV(P1 ... Pn)
Trading Use
Bollinger bands are an indication of the volatility of recent prices. If the recent prices have a larger range than the previous prices, the bollinger bands will expand. If the recent prices have a smaller range than the previous prices, the bollinger bands will contract.
Bollinger bands are used in many different ways by different traders. Some traders make trades when the price moves above or below the bollinger bands (i.e. when the price breaks out of the bollinger bands channel). Some traders make trades near the moving average, and use the bollinger bands as targets. Bollinger bands are also used by options traders that trade using volatility, because recent volatility is part of the calculation of options' premiums.
