How Bollinger Bands Commodity Trading Indicator Works

Bollinger Bands indicator calculations uses standard deviations to draw the bands, the default value used is 2.

Bollinger Bands Commodities Trading Calculation

middle Bollinger band technical indicator line is a simple moving average

The upper Bollinger band line is: Middle line + Standard Deviations

The lower Bollinger band line is: Middle line - Standard Deviation

Bollinger bands commodity indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average and the bands are then overlaid on the commodity chart price action.

Standard Deviation is a statistics concept. It originates from the notion of normal distribution. One standard deviation away from the mean either plus or minus, will enclose 67.5 % of all commodity price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all commodity price action movement.

This is why the Bollinger Bands indicator uses the standard deviation of 2 which will enclose 95 % of all commodity price action. Only 5 % of commodity chart price action will be outside the 3 commodity trading bollinger bands, this is why commodity traders open or close commodities trades when price hits one of the outer Bollinger Bands.

The Bollinger Bands indicator main function is to measure commodity price action volatility. What the Bollinger bands upper and lower limits try to do is to confine commodity price action of up to 95 percent of the possible closing commodity prices.

Bollinger Bands indicator compares the current closing commodity price with the moving average of the closing commodity price. The difference between these two commodity prices is the volatility of the current commodity price compared to the moving average. The commodity price volatility will increase or decrease the standard deviation of the bollinger bands commodity trading technical indicator.