Indicators: Bollinger Bands ®

Automated-Trading 2009.12.25 13:02

Bollinger Bands ® technical indicator (BB) is similar to Envelopes. The only difference is that the bands of Envelopes are plotted a fixed distance (%) away from the moving average, while the Bollinger Bands are plotted a certain number of standard deviations away from it. Standard deviation is a measure of volatility, therefore Bollinger Bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen and they contract during less volatile periods.

The following traits are particular to the Bollinger Band:

abrupt changes in prices tend to happen after the band has contracted due to decrease of volatility;
if prices break through the upper band, a continuation of the current trend is to be expected;
if the pikes and hollows outside the band are followed by pikes and hollows inside the band, a reverse of trend may occur;
the price movement that has started from one of the band’s lines usually reaches the opposite one.

The last observation is useful for forecasting price guideposts.

Author: MetaQuotes Software Corp.

Bollinger Band indicator