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Bollinger
Bands
Description
Bollinger
Bands are a type of envelope
developed by John Bollinger.
However, where envelopes are plotted at a
fixed percentage above and below a moving average,
Bollinger Bands are plotted at standard deviation
levels above and below a moving average.
You
may find the expert named "Equis - Bollinger
Bands" helpful in interpreting Bollinger
Bands.
Interpretation
When
displaying Bollinger Bands you are required to
select the number of periods in the bands and the
number of standard deviations between the bands
and the moving average.
Mr. Bollinger recommends default values of
"20" for the number of periods,
"simple" for the moving average method,
and "2" deviations.
He notes that periods of less than 10
periods do not appear to work very well.
Because
the spacing between Bollinger Bands is based on
the standard deviation of the security, the bands
widen when the security becomes more volatile, and
contract when the security becomes less volatile.
Mr.
Bollinger notes the following characteristics of
Bollinger Bands.
-
Sharp
price changes tend to occur after the bands
tighten, as volatility lessens.
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When
prices move outside the bands, a continuation
of the trend is implied.
-
Bottoms/tops
made outside the bands followed by
bottoms/tops made inside the bands call for
reversals in the trend.
-
A
move that originates at one band tends to go
all the way to the other band.
This observation is useful when
projecting price targets.
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