Bollinger Band - Bollinger Bands

 

Definition: A technical indicator consisting of the midline, a Simple Moving Average (SMA) with two bands of standard deviation plotted from it. Developed by John Bollinger in the early 1980s, the typical parameters are:

Middle Bollinger Band = 20-period simple moving average
Upper Bollinger Band = Middle Bollinger Band + 2 * 20-period standard deviation
Lower Bollinger Band = Middle Bollinger Band - 2 * 20-period standard deviation

Bollinger Bands are used to determine bandwidth (width of the bands) and %b (a measure of where price is in relation to the bands).

BandWidth = (Upper Bollinger Band - Lower Bollinger Band) / Middle Bollinger Band
%b = (Last - Lower Bollinger Band) / (Upper Bollinger Band - Lower Bollinger Band)

 

 

 

Additional Info: Standard deviation is a measure of volatility and because of this the Bollinger Bands will adjust themselves depending on market conditions. As volatility increases the bands widen and vice versa when volatility decreases. Many technical traders use the tightening of the bands (pinch) as an indication that volatility may about to increase significantly and a breakout may occur.

Related Terms: Simple Moving Average (SMA) - Breakout - Volatility

 

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