How Bollinger Band Works

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

Bollinger Band Calculation

The middle Bollinger bands indicator line is a simple moving average

The upper band line is: Middle line + Standard Deviations

Lower Bollinger band line is: Middle line - Standard Deviation

Bollinger Band considers the best default moving average MA to calculate the Bollinger bands to be 20 periods MA and the bands are then overlaid on the forex 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 percent of all price action movement.

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

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

Bollinger Band compares the current closing price with the moving average of the closing price. The difference between these 2 prices is the volatility of the ruling price compared and analyzed to the moving average. The forex price volatility will increase or decrease the standard deviations of the bollinger bands indicator.

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