Technical indicator

Bollinger Bands

Bollinger Bands place an upper and a lower band around a moving average at a distance set by the standard deviation of price. They adapt to volatility, giving a relative definition of “high” and “low” prices.

Type: Volatility / trend
Typical parameters: n = 20 days, D = 2 standard deviations
Main signal: Touches of the bands, band squeezes and breakouts

What Bollinger Bands show

Developed by John Bollinger in the 1980s from the older concept of trading bands, Bollinger Bands use the standard deviation of price as a measure of historical volatility. When the market is volatile the bands widen; when it is calm they contract. By definition, prices are relatively high at the upper band and relatively low at the lower band.

How to interpret the bands

Prices tend to stay between the upper and lower band.
Sharp price changes tend to follow periods when the bands tighten (the “squeeze”).
When prices move outside the bands, the current trend is likely to continue.
Tops and bottoms made outside the bands that are followed by tops and bottoms inside the bands often mark reversals.
A move that starts at one band tends to carry all the way to the other band.

Calculation

Middle = {SMA}_{n}

Upper = {SMA}_{n} + D \cdot σ_{n}

Lower = {SMA}_{n} - D \cdot σ_{n}

σ_{n} = \sqrt{\frac{1}{n} \sum_{j = t - n + 1}^{t} {(C_{j} - {SMA}_{n})}^{2}}

where n is the number of periods (usually 20), D is the number of standard deviations (usually 2) and SMA_n is the simple moving average of the closing price.

Bollinger Bands are similar to Envelopes, which shift the moving average by a fixed percentage instead of a volatility-based distance.

Technical indicators describe past prices and do not guarantee future results. Combine several indicators and test a strategy on historical data before trading it. See our disclaimer.