How Bollinger Bands Indicator Works

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

Bollinger Band Stock 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

Bollinger Band Stock Index indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average & the bands are then overlaid on the trade chart price action.

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

This is why the Bollinger Band Stock Index indicator uses the standard deviation of 2 which will enclose 95 % of all price action. Only 5 % of trade chart price action will be outside the 3 Stock Index bollinger bands, this is why Stock Index traders open or close Indices trades when price hits one of the outer Bollinger Bands.

The Bollinger Bands Stock Index indicator main function is to measure Indices price action volatility. What the Bollinger bands upper and lower limits try to do is to confine Indices price action of up to 95 percent of the possible closing prices.

Bollinger Band Stock Index indicator compares the current closing price with the moving average of the closing price. The difference between these two prices is the volatility of the current price compared to the moving average. The price volatility will increase or decrease the standard deviation of the bollinger bands Stock Index indicator.