How Bollinger Band Works
Calculations for Bollinger Bands employ the statistic known as standard deviation to chart the bands, utilizing a default setting of 2.
Bollinger Band Calculation
The middle Bollinger bands indicator line is a simple moving average
The upper band is the middle line plus standard deviations.
Lower Bollinger band line is: Middle line - Standard Deviation
The Bollinger Band indicator defaults to using a 20-period Moving Average (MA) as the foundation for calculating its bands, which are then superimposed onto the ongoing forex price action displayed on the currency chart.
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.
Bollinger Bands primarily measure price volatility in forex markets. The upper and lower bands aim to confine up to 95% of potential closing price movements within their range.
Bollinger Band compares the current closing price with the MA 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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