Liked for their attractive appearance and easy interpretation, Bollinger Bands are in the top three most popular indicators. John Bollinger developed two bands that reflect volatility and are located over and under a moving average.
To determine volatility and measure it, Bollinger uses standard deviations, which change with the up and down movement of volatility.
Here’s the formulae used to calculate it:
Middle Band = 20-day simple moving average (SMA)
Upper Band = 20-day SMA + (20-day standard deviation of price x 2)
Lower Band = 20-day SMA – (20-day standard deviation of price x 2)
The band in the middle is a simple moving average based on the last 20 periods. The standard deviation also has a 20 period time frame. The two other bands are typically 2 standard deviations apart from the moving average line.
These are the standard setting used in almost all trading platforms but we have to point out that Bollinger Bands are indeed one of the indicators that traders tend to adjust quite often.
John Bollinger himself makes several recommendations that can make it easier to use the indicator for longer timeframes.
If you want to cover 50 periods then you can increase the standard deviation multiplier from 2 to 2.1. He also advises that 10 period bands should have a smaller multiplier of 1.9.
Moves over or under the bands are NOT signals! They can be markers for strong volume, larger orders and being overbought or oversold but not exact tops or bottoms.
The calculation of the bands, according to its creator, should leave 89% of price action within them. Any move outside them is significant and there is a reason for it. But the most popular way to use the bands is to confirm support and resistance levels, as well as relatively small moves between the moving average and either the upper or lower band.
