Technical Indicators

Purpose

The Bollinger Bands indicator (named after its inventor) displays the current market volatility changes, confirms the direction, warns of a possible continuation or break-out of the trend, periods of consolidation, increasing volatility for break-outs as well as pinpoints local highs and lows.

Usage

The indicator consists of the three moving averages:

• Upper band - 20-day simple moving average (SMA) plus double standard price deviation.

  
  

• Middle band - 20-day SMA.

  
  

• Lower band - 20-day SMA minus double standard price deviation.

  
  

The increasing distance between the upper and the lower bands while volatility is growing, suggests of a price developing in a trend which direction correlates with the direction of the Middle line. In contrast to the above, at times of decreasing volatility when the bands are closing in, we should be expecting the price to move sidewards in a range.

The price moving outside the Bands may indicate either the trend’s continuation (when the bands are floating apart as the volatility increases) or the U-turn of the trend if the initial movement is exhausted. Either way each of the scenarios must be confirmed by other indicators such as RSI, ADX or MACD.

Anyhow the price crossing of the Middle line from below or above may be interpreted as a signal to buy or to sell respectively.

Calculation

The middle line (ML) is a regular Moving Average:

ML = SUM [CLOSE, N]/N

The top line (TL) is ML a deviation (D) higher:

TL = ML + (D*StdDev)

The bottom line (BL) is ML a deviation (D) lower.

BL = ML — (D*StdDev)

Where:

N — number of periods used in calculation;

SMA — Simple Moving Average;

StdDev — Standard Deviation.