Forex4you

Bollinger Bands

BB - Bolinger Bands

Bollinger Bands Technical Indicator (BB) is similar to Envelopes. The only difference is that the bands of Envelopes are plotted a fixed distance (%) away from the moving average, while the Bollinger Bands are plotted a certain number of standard deviations away from it. This number depends on volatility: distance increases during unstable market period and decreases during less volatile periods.

Bollinger Bands are usually plotted either on the price chart, or on the indicator chart. The important feature of the Bollinger Bands indicator is that the prices tend to remain in between the top and the bottom line of the bands, in periods of high volatility the bands widen leaving a lot of room to the prices to move in and during standstill periods the band contracts.

Sheer price changes tend to happen after the band has contracted, while prices breaking through the upper band is a sign of a continuation of the current trend.

Reverse of trend may occur if the tops and bottoms outside the band are followed by tops and bottoms inside the band.

For forecasting price guiding lines it is necessary to know that the price movement that has started from one of the band's borders usually reaches the opposite one.

Calculation:

Bollinger bands are formed by three lines. The middle line (MIDDLE LINE, ML) is a usual moving average

ML = SUM (CLOSE, N) / N = SMA (CLOSE, N)
The top line (TOP LINE, TL) is the same as the middle line shifted upwards by a certain number of standard deviations (D).
TL = ML + (D * StdDev)
The bottom line (BOTTOM LINE, BL) - the middle line shifted down by a certain number of standard deviations
BL = ML - (D * StdDev)

Where:

SUM (..., N) - sum for N periods;
CLOSE - closing price;
N - number of periods used for calculations;
SMA - simple moving average;
SQRT - square root;
StdDev ? standard deviation:
StdDev = SQRT (SUM ((CLOSE - SMA (CLOSE, N))^2, N)/N)

It is recommended to use 20-period simple moving average as the middle line and two standard deviations to calculate the band borders. Besides, moving averages of less than 10 periods are of little effect.

---

Similar information about indicators you can find in information system of trade platform MetaTrader 4 (Help-> Help Topics [F1] -> Ananlitics -> Technical Indicators).