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Bollinger Bands are a kind of moving average envelope. Whereas envelopes are plotted at a fixed distance (typically a percentage value) above and below the moving average, Bollinger Bands exist at standard deviation levels above and below the moving average. Standard deviation relies on volatility, and the bands are therefore self-adjusting - during volatile conditions they widen; during slack times they narrow. For day trading these bands may be useful, as they give ranges beyond which the market is unlikely to move, much as the Camarilla {b} Equation 'Market Reverses' level does. Created by John Bollinger, the basic point of Bollinger Bands is that prices will generally stay within the upper and lower bands. Experts claim that if the bands contract, they will soon widen again; if price moves outside the bands, the trend is likely to continue, and bottoms and tops made outside the bands followed by bottoms and tops made inside the bands imply reversals in the current trend. Also, a move starting at one band will generally go all the way to the other side. Bollinger Bands are three bands. The middle band is a moving average, typically 20 days. The upper band is the middle band, shifted up by a number of standard deviations. The lower band is the middle band shifted down by the same number of sd's. Mr Bollinger allegedly recommends 2 standard deviations built on a simple 20 day MA.. |
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