What are Bollinger Bands?
Bollinger Bands are a tool used in technical analysis of securities prices. Bollinger Bands are curves plotted in and around the price structure that define whether price is high or low on a relative basis. A measure of volatility, standard deviation, is used to set the width of the bands making them fully adaptive to changing market conditions. The defaults are bands spread above and below a 20-day simple moving average by two standard deviations.
They are curves drawn in and around the price structure on a chart providing a relative definition of high and low. To wit: Prices near the upper band are high, prices near the lower band are low. The base of the bands is a moving average that is descriptive of the intermediate-term trend. This average is known as the middle band and its default length is 20 periods. The width of the bands is determined by a measure of volatility called standard deviation. The data for the volatility calculation is the same data that was used for the moving average. The upper and lower bands are drawn at a default distance of two standard deviations from the average. These are the standard Bollinger Band formulas Upper band = Middle band + 2 standard deviations Middle band = 20-period moving average Lower band = Middle band – 2 standard deviations Here is an example of Bollinger Bands applied to a chart: To teach you how to use Bollinger Bands effectively would take a book, however the following rules
