| Characteristic: | Support & Resistance and Volatility | ||
| Parameter Defaults: | MA Period | 20 | controls the measurement period for the average |
| Std Deviation | controls the placement of the bands around the average | ||
| Plots: | BLG UP | Upper Band | |
| BLG DP | Lower Band | ||
Developed by John Bollinger, Bollinger Bands were and are a volatility bands drawn around a simple moving average. They are calculated using the standard deviation of price over the same period as the moving average and plotted as lines above and below the moving average.
Since moving averages have been traditionally used to identify the underlying trend, Bollinger Bands combine this concept with the volatility of each individual market (the standard deviation) – to plot an envelope.
In brief, standard deviation represents a normalized distribution curve, shaped
rather like a bell tapering off to each side. From a sample of data it is
expected that on average, a deviation of one from the mean (the highest point)
on each side would represent 68% of the sample results. A deviation of two from
the mean would represent 95% of the sample results. Thus, the implication is
that by taking two standard deviations from a moving average it will contain
95% of price action. Prices outside of the band should only occur 5% of the
time and thus any movement out side should be considered an abnormality.
The distance between upper and lower Bollinger Bands is a reflection of volatility. As price forces itself away from the average, the standard deviation rises and thus the bands will fluctuate in varying amounts away from the average. During sideways periods, prices reaching the bands may indicate overbought or oversold conditions. Strong movement up through the upper band or down through the lower band may indicate the beginning of a trend.
The 10 minute GBPJPY chart shows how much of the price action in non-trending
periods are broadly held within the bands. As the market trends, there is a
persistent pattern of breach of the Bollinger Bands.
