Bollinger bands are calculated as standard deviations
above and below an average based on closing prices.
A
useful addition to
envelope analysis is a new approach devised by John
Bollinger. Rather than being plotted as fixed
percentages above and below
an
Moving Average, Bollinger bands are calculated as standard
deviations above and below an average based on closing
prices. They are designed with the concept that the
bands widen and narrow as the price trend becomes more
or less volatile.
Interpreting Bollinger Bands
The deviation setting
for the Bollinger bands determines the distance
between the outer bands and the center one.
T
here are several rules for interpreting the bands,
When the bands narrow, there is a tendency for sharp
price changes to follow. This, of course, is another
way of saying that when prices trade in a narrow range
and lose volatility, demand and supply are in a fine
state of balance. In this context, a narrowing of the
band is always relative to the recent past, and that's
where Bollinger bands can help in visually showing the narrowing
process. They also give us some indication of when a
breakout might materialize because they start to diverge
once the price begins to take off.
Moving Average - Bollinger
Bands
