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Bollinger Bands |
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Originally developed by John Bollinger, Bollinger Bands are volatility bands drawn around a simple moving average. They are calculated by utilizing the standard deviation of price over the same period as the moving average and plotted as lines above and below the moving average.
Since moving averages are customarily used to identify the underlying trend, Bollinger Bands combine this idea with the volatility of each individual market in order to plot an envelope.
To sum up, Standard Deviation symbolizes a normalized distribution curve, shaped like a bell tapering off to each side. It is expected that on average, a deviation of one from the mean (the highest point) on each side would represent 68% of the sample results. A deviation of two from the mean would represent 95% of the sample results. Thus, the implication is that by taking two standard deviations from a moving average it will contain 95% of price action. Prices outside of the band should only occur 5% of the time and thus any movement out side should be considered an aberration.
The distance between upper and lower Bollinger Bands is an indication of volatility. As price forces itself away from the average, the standard deviation rises and thus the bands will vary in changeable amounts away from the average. During sideways periods, prices reaching the bands may point to overbought or oversold conditions. Strong movement up through the upper band or down through the lower band may point toward the start of a trend. As the market trends, there is a constant pattern of breach of the Bollinger Bands.
Bollinger Bands B%
As the use of Bollinger Bands has become increasingly popular, with a greater emphasis on identifying the chances of one band containing price rather than penetrating the band in a trend, the identification of trend reversals has come to be handled by Bollinger B%, which is a dynamic momentum indicator.
The formula for which is:
BLG B% = (Close – Band Low)/(Band high – Band Low)
Essentially this formula is nearly identical to that for stochastics, as it compares the percentage position of current price within the recent range. The difference between the two is that in Bollinger B%, the range is measured by the bands rather than price.
While stochastics will always oscillate in a range between zero and 100 since price can never break through above the price range without increasing the price range itself, price does penetrate the Bollinger Bands on fairly regular occasions. Thus Bollinger B% can move above 100 and below zero, indicating that the close is outside of the bands.
The most valuable feature of Bollinger B% is the use of divergences. It is common in Bollinger Bands for price to penetrate the bands during a directional move, then on a new price fail to penetrate the band again. This causes a divergence of price against the indicator and can be an early indication of a reversal.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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© ForexCenter.com, 2005, All Rights Reserved
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History