Bollingers Bands

Developed by John Bollinger in the 1980s, Bollinger Bands are a technical indicator that can be used to measure volatility. Bollinger Bands consist of three curved lines:

  • an N-period Moving Average (MA) is the middle band, usually a 20-periods MA (simple or exponential)
  • the upper band takes the standard deviation of the N-period which is then shifted above the moving average (MA + X*σ)
  • a lower band, again, takes the standard deviation of the N-period which is then shift below the moving average by the same distance as the upper band was shifted upwards (MA – X*σ).

σ = Standard Deviation
Typical value for X is usually 2.

When markets become volatile, the bands widen, during periods of low volatility, they contract. Bollinger Bands are used by traders to provide a relative measure of highness and lowness of the price action. Some traders consider the break-through of the upper/lower band by the price action as a confirmation of the current trend.

In the picture below, for example, EUR/USD goes up but prices fail to break the upper Bollinger Band. If the prices break the upper BB, based on the interpretation of Bollinger Bands, it is a signal of strength of the prices and confirmation of the positive trend; if the prices are not able to break the upper BB, it can be a signal that the current trend is running out of steam and prices may pull back.

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