Advanced Tools Plug-in:

Bollinger Bands Overlay Indicator

Bollinger Bands are a type of trading envelope. They are lines at an interval around the moving average. They consist of a moving average and two different standard deviations represented as a line above the MA (Moving Average) and a line below the MA. The line above is the MA plus two standard deviations; the line below is the MA minus two standard deviations. Bollinger Bands are used to determine overbought and oversold conditions and to project price targets.

John Bollinger created Bollinger Bands in an effort to gage the volatility and condition of a market. These bands are used to determine the trading range and give an indication of when to buy and when to sell.

Bollinger Bands are also used to indicate market volatility - the wider the bands the greater the volatility. Inversely, the narrower the bands, the lesser the volatility. By plotting two lines at an interval around a moving average, Bollinger bands give a good indication of market conditions and price relation. The moving average which the band is based on works as an indicator to confirm trade signals.

The most basic use of the Bollinger Band is to look for a chart top that occurs above the uppermost band, followed by another top that is below the upper band. This set of chart tops would create a sell signal, as neither upward price direction was able to sustain a rally.

The opposite would occur for a buy signal. There would be a chart bottom below the lower band followed by a bottom above the lower band. This is a buy signal because neither sell was able to continue, indicated by one below and the other above the lowest band.

Calculation

Parameters: Period (20) - the number of bars, or period, used to calculate the study. John Bollinger, the creator of this study, states that those periods of less than ten days do not seem to work well for Bollinger Bands. He says that the optimal period for most applications is 20 or 21 days.

Standard Deviation (2) - the percent of one standard deviation. John Bollinger suggests that if you reduce the number of days used to calculate the bands, you should also reduce the number of deviations and vise versa. For example, 200 percent of a standard deviation means two deviations above and two deviations below the moving average. If you use a period of 50, you may want to use 250 percent of a standard deviation. For a period of 10, you may want to use 150 or 100 percent.