How Bollinger Bands Stock Indices Indicator Works
Bollinger Bands stock indices indicator calculations uses standard deviation to draw the bands, the default value used is 2.
Bollinger Bands Stock Indices Trading Calculation
The middle Bollinger band line is a simple moving average
The upper Bollinger band line is: Middle line + Standard Deviation
The lower Bollinger band line is: Middle line - Standard Deviation
Bollinger bands stock indices indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average and the bands are then overlaid on the stock indices 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 % of all stock index price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all stock index price action movement.
This is why the Bollinger Bands stock indices indicator uses the standard deviation of 2 which will enclose 95 % of all stock index price action. Only 5 % of stock indices chart price action will be outside the 3 stock indices bollinger bands, this is why stock indices traders open or close stock index trades when stock index price hits one of the outer Bollinger Bands.
The Bollinger Bands stock indices indicator main function is to measure stock index price action volatility. What the Bollinger bands upper and lower limits try to do is to confine stock index price action of up to 95 percent of the possible closing stock indices prices.
Bollinger Bands stock indices indicator compares the current closing stock index price with the moving average of the closing stock index price. The difference between these two stock indices prices is the volatility of the current stock index price compared to the moving average. The stock index price volatility will increase or decrease the standard deviation of the bollinger bands stock indices indicator.