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How Bollinger Band Indicator Works

Bollinger Band Index indicator calculations uses standard deviation to plot the bands, default value used is 2.

Bollinger Band Index Calculation

middle Bollinger band line is a simple moving average

upper Bollinger band line is: Middle line + Standard Deviation

lower Bollinger band line is: Middle line - Standard Deviation

The Bollinger Bands Index technical indicator designates the 20-period moving average as the optimal choice for calculating the Bollinger Bands, which are then superimposed directly onto the price action displayed on the trading chart.

Standard Deviation is a statistics concept. It originates from the notion of normal distribution. 1 standard deviation away from the mean average either plus or minus, will enclose 67.5 % of all price action movement. Two standard deviations away from the mean average either plus or minus, will enclose 95 % of all price action movement.

The Bollinger Bands Index indicator utilizes a standard deviation of 2 to encompass 95% of all price movements. This means that only 5% of trading chart price action will fall outside the three Bollinger Bands, prompting Stock Index traders to open or close trades when the price touches one of the outer bands.

The Bollinger Bands Index tool mainly checks volatility in index prices. The upper and lower bands aim to hold about 95 percent of closing prices for indices.

Bollinger Bands Index indicator compares and analyzes the current closing price with the MA of the closing price. The difference between these 2 prices is the volatility of the prevailing market price compared and analyzed to the moving average. The price volatility will increase or decrease the standard deviations of the bollinger bands Index indicator.

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