Bollinger Bands

Bollinger bands are used in chart analysis, they limit a moving average of the price. John Bollinger developed them in the 1980s under the assumption that price values tend to the mean of a trend channel with high probability. When they break out of the channel formed by the Bollinger bands, a change in trend is indicated with high probability.

To display Bollinger bands, the corresponding charting program needs the moving average of a defined period number, for which John Bollinger suggested 20 days in the stock market. Then the two boundaries – above and below – are formed by the Bollinger bands from the determination of the distance from the moving average with a certain standard deviation, which results from the found (also changing) volatility. If the period is chosen correctly, Bollinger bands represent the trend channel quite reliably. Even experienced traders, who are rather skeptical about technical indicators, use them by default. The standard deviation factor plays a big role. John Bollinger recommended two, but it might be easier to let the chart program draw the Bollinger bands with changing values until a clean channel results.