Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades.
Bollinger Bands consist of:
• a middle band being an N-period simple moving average (MA)
• an upper band at K times an N-period standard deviation abovethe middle band (MA + Kσ)
• a lower band at K times an N-period standard deviation below the middleband (MA − Kσ) S&P 500 with 20 day, two standard deviation Bollinger Bands, %b and BandWidth.
Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages are a common second choice. Usually the same period is used for both the middle band and the calculation of standard deviation.
The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.