Bollinger
Bands...
Bollinger Bands are a kind of trading envelope.
They are lines plotted at an interval around a moving average. Bollinger Bands
consist of a moving average and two standard deviations charted as one line
above and one line below the moving average. The line above is two standard
deviations added to the moving average. The line below is two standard
deviations subtracted from the moving average. Traders generally use them to
determine overbought and oversold zones, to confirm divergences between prices
and indicators, and to project price targets. The wider the bands are, the
greater the volatility is. The narrower the bands are, the lesser the
volatility is. The moving average is calculated on the close.
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, 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.
Computation
- Calculate the moving average. The formula
is:
- Pn the price you pay for the nth
interval
- n the number of periods you select
- Subtract the moving average from each of
the individual data points used in the moving average calculation. This
gives you a list of deviations from the average. Square each deviation and
add them all together. Divide this sum by the number of periods you
selected.
- Take the square root of d. This gives you
the standard deviation.
- Compute the bands by using the following
formulas:
- Pn is the price you pay for the nth
interval
- n is the number of periods you select
There is risk of loss in futures
trading. Past results are not indicative of future results.
|
