Bollinger Bands Explained
Two bands drawn above and below a 20-session average. They widen when the price is volatile and narrow when it's calm. Created by John Bollinger in the 1980s.
How it's calculated
Middle band: 20-session SMA. Upper and lower bands: the middle band plus and minus 2 standard deviations of the last 20 closes.
How traders use it
A close near the upper band means the price is high relative to its recent range; near the lower band, low. A “squeeze” (very narrow bands) often comes before a big move, though it doesn't say in which direction.
What people say
Bollinger himself warns against the most common use. In his rules: “Tags of the bands are just that, tags not signals”; in a strong trend the price can “walk up the upper Bollinger Band”; and closes outside the bands are “initially continuation signals, not reversal signals.” He recommends combining them with an unrelated indicator, such as one based on volume.
Practise with this indicator
Open a real hidden-stock chart with only this indicator turned on and see if it helps you beat the market.
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