Bollinger

Bollinger

== Bollinger Bands ==

Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s. They are 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.

Description

Bollinger Bands consist of:

• an N-period simple moving average (middle band)
• an upper band at K times an N-period standard deviation above the middle band (Bollinger Bands upper BB)
• a lower band at K times an N-period standard deviation below the middle band (Bollinger Bands lower BB)

Typically, values of N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages is a common second choice. Usually the same period is used for both the middle band and the calculation of standard deviation.

Purpose and Use

The purpose of Bollinger Bands is to provide a relative definition of high and low prices of a market. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

Effectiveness

Studies have shown that the penetration of Bollinger Bands only occurs up to 15% of the time. The reversion to the mean phenomenon is also helpful in identifying the trend.

See Also

• Technical analysis
• Volatility (finance)
• Standard deviation
• Keltner channel
• Moving average

External Links

• Official site