Bollinger Bands, invented by John Bollinger, are a simple moving average (often 20 period moving average) with a plus 2 standard deviation (the standard deviation is calculated using the same prices as the moving average) and a -2 standard deviation.

Standard Deviation Calculation

Some general notes and uses about trading bollinger bands:

  • Bollinger Bands use of 20 period moving average and +/- 2 standard deviation should be adjusted and/or optimized for the style of trading or investing you are doing.
  • Just because 2 standard deviation is generally assumed to mean 95% of the time a stock will fall between these two areas.  Remember this assumes a normal curve and a sufficient sample size, neither of which you have with this tool.  Don’t factor a 95% success rate with this tool.
  • The price tends to rise on the upper bollinger band and falls down the lower band.
  • If the price closes outside of the band this is generally a sign of a price continuation not a reversal.  Volume indicators is a good tool to verify with this.
  • Remember Bollinger Bands factor volatility and trend, so if you use confirmation signals it needs to not be correlated with either volatility (like a market volatility index (VIX)) nor trend.

Remember you have to learn to make the tools work in your strategy to make money, not make the tool your strategy.

Related posts:

  1. Relative Strength Index
  2. Moving Averages
  3. Stock Beta
  4. Trading Stock Market – Ups and Downs
  5. MACD – Moving Average Convergence Divergence

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