What are Bollinger Bands?
Bollinger bands consist of two volatility bands enveloping either sides of a simple moving average. The bands are calculated based on the standard deviation of the price during the same period as the moving averages. This standard deviation is plotted on either sides of the moving average. The distance between the upper and lower Bollinger bands shows the standard deviation of price or the volatility of the currency traded. As this price volatility increases, the outer bands move further away from the longer-term average. If the volatility decreases the bands move closer to the moving average. Normally, the price increases slowly with time, but sometimes due to nervous or greedy traders, the price will spike suddenly. Such spikes will not last for long and the prices will normally come back to reasonable values (or the moving average of the Bollinger bands). Such instability of the outer bands will give an indication to traders on the volatility of prices and the extent of variation of
Bollinger Bands are curves drawn in and around the price structure that provide relative definitions of high and low. What are Bollinger Bands used for? Knowing whether prices are high or low the investor/trader can make rational investment decisions by comparing price action to the action of indicators. What can Bollinger Bands be applied to? Most anything: stocks, indices, futures, currencies, mutual funds… How are Bollinger bands calculated? The base for the bands is a moving average and the band’s width is determined by volatility. Who created Bollinger Bands? John Bollinger, CFA, CMT The Capital Growth Letter will provide you with specific investment advice, improve your trading skills, and teach you how to analyze the market yourself John Bollinger, CFA, CMT is best known for his Bollinger Bands and for his years as a commentator on CNBC. If you’ve seen his segments on CNBC and wished he had time to go into more details his Capital Growth Letter is for you! John Bollinger has b
Bollinger bands are indicators used when trading stocks using a technical analysis approach. Technical analysis is an approach to investing in the market that attempts to use a disciplined market timing approach. Bollinger bands were developed by John Bollinger in the 1980s. Technical analysis approaches involve computing moving averages of the stock in interest. A moving average is simply an average that is computed over a period of time and repeated as time progresses. A typical moving average is the seven day moving average, computed by adding the price of the stock over the past seven trading days and dividing the result by seven. A day later, the average is again computed, but the price from the first day is dropped and the day two price becomes the day one price. This is repeated each day until the original day seven price is replaced. This process is repeated each trading day, and the results can be plotted as average stock price versus time. Using the same data set from which t
Pushed by his feeling that there should be a relationship between currency’s price movement and bands, John Bollinger invented the Bollinger Bands. He considered that this relationship is more relevant than the one between bands and fixed percentage amount. Bollinger Bands include the assumption that 95% of the price movement is included in two bands. Thus, the calculations consist of two standard deviations speaking in statistical terms. This estimation component provides bands with the adjustment possibility to any changes that can occur on the forex market. Three curves form the Bollinger Bands. Usually the simple moving average is used in order to draw the middle one and it serves as the base for the upper and lower bands which are plotted at two standard deviations. The exponential moving average is sometimes used in plotting in order to provide for a higher sensitivity of the indicator. This, however, provides for the greater market noise as well.
