Developed by John Bollinger, Bollinger Bands® are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases. The bands automatically widen when volatility increases and narrow when volatility decreases. This dynamic nature of Bollinger Bands also means they can be used on different securities with the standard settings. For signals, Bollinger Bands can be used to identify M tops and W bottoms or to determine the strength of the trend.
Bollinger Bands and the related indicators %b and bandwidth can be used to measure the “highness” or “lowness” of the price relative to previous trades. Bollinger Bands are a volatility indicator similar to the Keltner channel.
Bollinger Bands consist of:
Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average (SMA), but other types of averages can be employed as needed. Exponential moving averages (EMAs) are a common second choice. Usually, the same period is used for both the middle band and the calculation of standard deviation.
The use of Bollinger Bands varies widely among traders. Some traders buy when price touches ...