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Bollinger Bands - BB

The Bollinger Bands indicator (BB) is similar to the Envelopes. The only difference is that the Envelope bands are placed on a fixed distance (%) from moving average, while the Bollinger Bands are formed on a distance that equals a corresponding number of Standard Deviations. The bands correct their width because a SD value depends on volatility. When the market is volatile, the width enlarges, and when the market is calm, it narrows.

The Bollinger Bands are usually placed on a price chart. However, they can be also applied to an indicator chart. Just like Envelopes, the point of the Bollinger Bands lies upon the fact that prices tend to stay within the range between the upper and lower bands. The peculiarity of the Bollinger Bands is variable width that is influenced by market volatility. When prices are highly volatile, the bands widen. When the volatility is low, the bands narrow, thus prices stay within their ranges.

This indicator has the following distinctive features:

• high price correction that usually takes place after band narrowing (low volatility);

• prices break through the band boundaries which means a current trend will continue;

• trend reversal is possible in case peaks and troughs within bands follow those beyond bands;

• prices’ dynamic, which started from one of the bands, as a rule, touches the opposite band.

The last statement is especially useful when forecasting price targets.

Calculation

Bollinger bands are formed by three lines. The middle line (ML) is a usual Moving Average.

ML = SUM [CLOSE, N]/N

The top line, TL, is the same as the middle line a certain number of standard deviations (D) higher than the ML.

TL = ML + (D*StdDev)

The bottom line (BL) is the middle line shifted down by the same number of standard deviations.

BL = ML - (D*StdDev)

where

N - is the number of periods used in calculation;

SMA - Simple Moving Average;

StdDev - means Standard Deviation.

StdDev = SQRT(SUM[(CLOSE - SMA(CLOSE, N))^2, N]/N)

It is recommended to use 20-period Simple Moving Average as the middle line, and plot top and bottom lines two standard deviations away from it. Besides, moving averages of less than 10 periods are of little effect.

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