How Bollinger Bands Indicator Works

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

Bollinger Bands Calculation

The middle Bollinger bands indicator line is a simple moving average MA

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

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

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

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

This is why the Bollinger Band uses standard deviation of 2 that will enclose 95 % of all price action. Only 5 percentage of the chart price action will be outside the three bollinger bands, this is why traders open or close trades when price hits one of the outer Bollinger Bands.

The Bollinger Band main function is to measure price action volatility. What the Bollinger bands upper and lower limits try to do is to confine price action of upto 95 percentage of the possible closing prices.

Bollinger Bands indicator compares current closing price with the moving average(MA) of the closing price. The difference between these 2 trading prices is the volatility of the current price compared to the moving average. The volatility of price will increase/decrease standard deviations of the bollinger bands indicator.

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