Bollinger Bands – What Are They All About?
Introduced by John Bollinger and so named, Bollinger bands are highly appreciated technical tools used primarily for trading. At the time when Bollinger bands were created, the popular belief was that volatility is static. The traditional concept was broken by the idea that it is dynamic not static and hence the Bollinger bands gained popularity.
The primary purpose is to define high and low in the context of prices as compared to the trends noticed in the previous trades.
The indicators in the Bollinger bands are of two types: percent bandwidth and percent b.
• Percent bandwidththis indicates how wide, on normal basis, are the Bollinger bands.
Bandwidth = (upper BB – lower BB) / middle BB
• %b = (last – lower BB) / (upper BB – lower BB)
To interpret the Bollinger bands readings you are only required to understand the very basic terminology and rules of thumb that guide you in reading the indications provided. There are three curves that would be displayed to you. These curves will be formed relative to the security sizes. This is what the three curves or the bands show:
• The middle band: this is an N period simple moving average MA. The middle band gives a measure of the trend of the intermediate term, which can usually be seen as the baseline position
• The upper and the lower bands at K times an N-period standard deviation, above and below the middle band respectively.
• In mathematical language, the upper band would be MA + k∝ and the lower band would be MA - K∝.
• Note that in the above context, the value for K is typically 2, and that for ∝ is usually taken to be 20.
• Volatility determines the distance between the upper band and the lower band.
• To suit your job and preferences, you can adjust the default parameters yourself.
Once you understand the above points and start applying them as you read the display you would find the Bollinger bands to be very easy and user friendly indicators.
The Bollinger bands are particularly sensitive to any fluctuations or minute changes in the data and hence give you precise and accurate result in relative terms.The effectiveness of the use of Bollinger bands has especially been demonstrated in Chinese businesses. It is also being used for global safety purposes as it can measure the accident rates.
Read more details about bollinger bands and bollinger bands indicator.
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