How Bollinger Bands Indicator Works

Bollinger Bands use standard deviation for the bands. The default setting 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 shows the middle line minus standard deviation.

For calculating Bollinger Bands, it's best to use a 20-period moving average, and then these bands are put on top of the price movements on the trading chart.

Standard Deviation is a concept from statistics. It comes from the idea of a normal distribution. One standard deviation away from the average, either higher or lower, will include 67.5 percent of all price movement. Two standard deviations away from the average, either higher or lower, will include 95 percent of all price 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 primary function of the Bollinger Band is to quantify the volatility of price movement. Its upper and lower bands aim to contain approximately 95% of all potential closing prices within their range.

The Bollinger Bands indicator assesses the current closing price in relation to the moving average (MA) of that closing price. The disparity between these two trading prices indicates the volatility of the current price compared to the moving average. The volatility will influence the standard deviations of the Bollinger Bands indicator, causing them to expand or contract.

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How Bollinger Bands Indicator Works

Bollinger Bands Calculation