How Bollinger Band Indicator Works

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

Bollinger Band Calculation

The middle Bollinger band technical 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 Bands indicator 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 notion of normal distribution. One standard deviation away from the mean 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 percent% of all price action movement.

This is why the Bollinger Bands indicator uses the standard deviation of 2 which will enclose 95 % of all price action. Only 5 percentage% of 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 Band.

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

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

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How Bollinger Band Indicator Works

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