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 commodity trading. Past results are not indicative
of future results.
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