Bollinger Band

• 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 contract when volatility decreases. Their dynamic nature allows them to be used on different securities with the standard settings.

• Bollinger Band calculation formula

  The period is the number of intervals that are included in the Bollinger Band calculation. A setting of (20, 2) means that the period and standard deviation are set to 20 and 2.0, respectively. For Bollinger Bands with a setting of 20, 2, the bands are calculated according to the following formulas:

• Upper band = 20-day SMA + (20-day standard deviation x 2)

• Lower band = 20-day SMA – (20-day standard deviation x 2)

• How to use Bollinger Bands

  Bollinger Bands can be used on all chart timeframe including weekly, daily, or five-minute charts. The settings can be adjusted to suit different trading styles. When the instrument's price moves towards the upper band, this is a signal that it is overbought. As a general rule, traders look to sell when they believe that an instrument is overbought. When the instrument's price moves towards the lower band, this is a signal that it's oversold. Generally, traders look to buy securities that are oversold.