How Bollinger Bands Works
The Bollinger Bands indicator uses standard deviations to create the bands. It sets the default at 2.
Bollinger Bands Calculation
The middle Bollinger band indicator line represents a simple moving average.
The upper band indicator is: Middle line + Standard Deviations
The lower part of the Bollinger band indicator shows: Middle line - Standard amount of change
The Bollinger Bands indicator usually uses a 20-period moving average MA to figure out the Bollingers, and then the bands are put on top of the price movements on the chart.
Standard deviation comes from stats and normal distribution ideas. One deviation from the mean, up or down, covers 67.5% of price moves. Two deviations from the mean, up or down, cover 95% of price moves.
Bollinger Bands help with stock trading. They cover price moves within two standard deviations. This catches 95% of price action. Just 5% goes outside the bands. Use them to find entry or exit points when prices near the outer bands.
Bollinger Bands track price volatility. Their upper and lower lines hold about 95% of closing prices.
Bollinger Bands assess the current closing price in relation to the moving average (MA) of the closing price. The variance between these two figures indicates the market price's volatility when compared to the MA. Changes in price volatility will influence the standard deviations of the Bollinger Bands trading indicator.
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