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 - 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 - 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.
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