Description

• Developed by John Bollinger in the 1980s, it has two lines –upper and lower- plotted on a moving average median
• Bollinger bands are volatility indicators plotted on standard deviations
• They are highly responsive to price actions and thereby an effective trending envelope to the price line
• They indicate when the price is very high or very low
• This indicator can also be used to identify early signals

Interpretation

• Narrowing of bands indicate low volatility implying possibility of breakouts while widening means high volatility implying reversals
• When price falls below the lower line, it is too low and, when it goes above upper line, is too high

Default Parameters Used/Inputs

• Price line
• Average Type
• Average Bars- number of bars for calculating selected average
• Standard Deviation Bars- number of bars for calculating Standard Deviation
• Standard Deviation Factor- a whole number by which the deviation lines should be plotted

Returns/Output

Bollinger Bands around the price line indicating volatility and marking too high/too low fluctuations of price

Formula

Upper Band = Moving Average + SD factor * Standard Deviation (SD bars)

Lower Band = Moving Average - SD factor * Standard Deviation (SD bars)

Factor – It is the absolute number. E.g. 1,2,3 etc