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Trading and Investment Terms

Bollinger bands

Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. 

They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time.

 

Bollinger Bands can be applied in all the financial markets including equities, forex, commodities, and futures. 

 

Bollinger Bands can be used in most time frames, from very short-term periods, to hourly, daily, weekly, or monthly.

 

Three lines compose Bollinger Bands:

  •  A simple moving average (middle band) and an upper and lower band.
  • The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average but can be modified.

​Calculation

First, calculate a simple moving average. 

Next, calculate the standard deviation over the same number of periods as the simple moving average.

 For the upper band, add the standard deviation to the moving average. For the lower band, subtract the standard deviation from the moving average.

 

Typical values used:

Short term: 10-day moving average, bands at 1.5 standard deviations. (1.5 times the standard dev. +/- the SMA)

Medium-term: 20-day moving average, bands at 2 standard deviations.

Long term: 50-day moving average, bands at 2.5 standard deviations.

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