How Bollinger Bands Indicator Works

Bollinger Band indicator calculations uses standard deviations to draw the bands, the default value used is 2.

Bollinger Bands Calculation

middle Bollinger band technical indicator line is a simple moving average

The upper Bollinger band indicator is: Middle line + Standard Deviations

The lower Bollinger band indicator is: Middle line - Standard Deviation

Bollinger Band indicator considers the best default moving average MA to calculate the Bollingers to be 20 periods moving average and the bands are then overlaid on the 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 percentage% of all price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 percent% of all price action movement.

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

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

Bollinger Bands 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 MA. The price volatility will increase/decrease the standard deviation of the bollinger bands trading indicator.

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How Bollinger Bands Indicator Works

Bollinger Bands Calculation