In this article we are dedicated to one of the advanced charting features most used by online trading experts, Bollinger bands . These are based on the volatility of a security or its ‘standard deviation’. Before continuing, let’s better define these two concepts.
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Volatility and Standard Deviation: Key Concepts for Understanding Bollinger Bands
The volatility in economics is an index representing the variation of the share price and therefore helps calculate how much and how to change a price at a given time interval.
The standard deviation, on the other hand, is an index of dispersion of experimental measures, that is, an estimate (a calculation by estimate) of the variability of some data or of a random variable. To try this technique for free, download the recommended free platform here .
Expected value and precision
The base from which to start for the definition of the standard deviation and therefore of the volatility is the so-called expected value . The concept of precision is also linked to this: the closer you get to the expected value, the more results you will obtain suitable for your study.
The standard deviation, seen above, is a way of expressing the spread of data around a position index , such as the expected value. So in simpler words, the less deviation there is and the closer it is to the expected value, the more precision there is.
How to use Bollinger bands
Let’s now see how to use these concepts and apply them to Bollinger bands. First, to calculate Bollinger bands, a moving average of days G (for example, 20 days) is used to which the value of the standard deviation multiplied by a certain factor F (the multiplier of the standard deviation applied to the historical series). prices, usually 2 or 3).
Here is the result of the configuration set above. Photos (screenshots) are from Plus500 trading platform .
What are Bollinger Bands for?
We have seen what factors are used to calculate Bollinger Bands, but what are they for? These bands can be used to measure trend and volatility.
In fact, one of the fundamental elements in trading is the calculation of volatility , in order to assess the risk of a certain transaction and more easily recognize trends and price congestion, or distribution or accumulation of the stock.
Bollinger Bands can offer buy and sell signals if these conditions are met:
- The price chart breaks out of the upper band and then re-enters. In this case we have a sell signal . It corresponds to a rapid price increase (exit from the band) and a subsequent adjustment or deceleration (return to the band).
- The chart exits the lower band and then re-enters. In this case we have a buy signal . It corresponds to a rapid price drop to a stop and a probable reversal of the trend.
Bollinger Bands could offer false signals, such as exiting from above, re-entering, and continuing the uptrend (or vice versa). For this reason, John Bollinger himself (the inventor of the bands themselves) recommends using other indicators to test the performance of the bands , that is, using them together with other functions to have a constant confirmation of their accuracy. When two or more indicators confirm the behavior of these bands, the signal obtained acquires meaning (always bearing in mind that it is a predictive analysis , that is, it tries to predict future events and therefore not yet verified).
Go to the next lesson: Standard Deviation
Bollinger bands faq
What are Bollinger Bands?
Bollinger Bands are one of the most used indicators in technical analysis and are used to measure trend and volatility.
How are Bollinger bands formed?
To calculate Bollinger bands, a G-day moving average is used to which the value of the standard deviation multiplied by a certain factor F (standard deviation multiplier) is subtracted or added .
How do you read Bollinger bands?
The upper and lower bars must be taken into account, between which the price must move.
What signals do the Bollinger bands offer?
If the price breaks out of the upper bar and then goes back in, it is a sell signal. If the price breaks out of the lower bar and then re-enters, it is a buy signal.
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