Bollinger Bands

bollinger bands

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.

To see Bollinger bands in action, you can easily apply them on the eToro trading platform   , which can also be accessed for free with a demo account and without depositing,  from this official page  .

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).

bollinger-bands-factors

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.