Bollinger Bands

Description

Bollinger Bands are a type of envelope developed by John Bollinger. However, where envelopes are plotted at a fixed percentage above and below a moving average, Bollinger Bands are plotted at standard deviation levels above and below a moving average.

You may find the expert named "Equis - Bollinger Bands" helpful in interpreting Bollinger Bands.

Interpretation

When displaying Bollinger Bands you are required to select the number of periods in the bands and the number of standard deviations between the bands and the moving average.  Mr. Bollinger recommends default values of "20" for the number of periods, "simple" for the moving average method, and "2" deviations.  He notes that periods of less than 10 periods do not appear to work very well.

Because the spacing between Bollinger Bands is based on the standard deviation of the security, the bands widen when the security becomes more volatile, and contract when the security becomes less volatile.

Mr. Bollinger notes the following characteristics of Bollinger Bands.

• Sharp price changes tend to occur after the bands tighten, as volatility lessens.

• When prices move outside the bands, a continuation of the trend is implied.

• Bottoms/tops made outside the bands followed by bottoms/tops made inside the bands call for reversals in the trend.

• A move that originates at one band tends to go all the way to the other band.  This observation is useful when projecting price targets.