The Bollinger Bands indicator is a popular charting tool to measure a security's volatility and potential price movements. The indicator was developed by John Bollinger in the 1980s and consists of three lines plotted on a chart:
- The Middle Band: This is a simple moving average (SMA) of the security's price over a specified time period, typically 20 periods.
- The Upper Band: This is calculated by adding two standard deviations to the middle band.
- The Lower Band: This is calculated by subtracting two standard deviations from the middle band.
Traders use the Bollinger Bands indicator to identify potential trading opportunities based on the relationship between the security's price and the Bollinger Bands. When a security's price touches or crosses either the upper or lower Bollinger Band, it may signal a potential trend reversal or a shift in market momentum. When a security's price approaches the upper band, it may be considered overbought, while a price approaching the lower band may be considered oversold.
The following parameters can be adjusted based on the individual trader's preferences and risk tolerance:
Length: The number of data points used to calculate the SMA line. The default value is 20, which means the SMA line is calculated using the last 20 data points.
Displace: The number of periods the Bollinger Band lines are shifted forward or backward in time.
NumDevDown: The number of standard deviations the lower band is from the middle band, defaulting at 2 standard deviations.
NumDevUp: The number of standard deviations the upper band is from the middle band, defaulting at 2 standard deviations.
Price: Type of price used for Bollinger Bands calculation: HIGH, LOW, OPEN, CLOSE, VOLUME, VWAP.
Average Type: Exponential, Hull, Simple, Smoothed, Weighted, Wilder’s.
Bollinger Bands Indicator on chart
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.