Bollinger Bands

Indicator Type: Trend Following

Introduction:
Bollinger Bands are a type of trading envelope. They are lines at and interval around the moving average. They consist of a moving average and two different standard deviations represented as a line above the MA and a line below the MA. The line above is the MA plus two standard deviations; the line below is the MA minus two standard deviations. Bollinger Bands are used to determine overbought and oversold conditions and to project price targets.

John Bollinger, created Bollinger bands in an effort to gage the volatility and condition of a market. These bands are used to determine the trading range and give an indication of when to buy and when to sell. Bollinger bands are also used to indicate market volatility, the wider the bands the greater the volatility. Inversely the narrower the bands the lesser the volatility. By plotting two lines at an interval around a moving average Bollinger bands give a good indication of market conditions and price relation. The moving average which the band is based on works as an indicator to confirm trade signals.

Interpretation:
The most basic use of the Bollinger Band is to look for a chart top that occurs above the uppermost band, followed by another top that is below the upper band. This set of chart tops would create a sell signal, as neither upward price direction was able to sustain a rally.

The opposite would occur for a buy signal, there would be a chart bottom below the lower band followed by a bottom above the lower band. This is a buy signal because neither sell of was able to continue, indicated by one below and the other above the lowest band.
 

Program Options - Bollinger Bands

See the numbered areas below the screen shot for further instruction.

1. Bands: The Bollinger Band Indicator is made up of three lines on the chart.  They are defined in options as Upper, Middle and Lower Bands.
2. Period:  Define the period interval for the Bollinger Band.  This value effects all three lines.
3. Type: The Bollinger Band Indicator can be based on a Simple, Linearly Weighted or Exponentially Smoothed Average.  Click on the drop down menu to change the type of average.
4. Data:  The average can be based on four values:  Open, High, Low or Close.  Click on the drop down menu to change the data the average is based on.
5. Style & Color:  Bollinger Band lines can be displayed as solid, dashed, or dotted lines.  Click on the drop down menu to specify the type of line style.  Also, next to the drop down menu is the color for the line.  Click on the color box and a color panel will open for you to specify the new color.
6. Preview Window: This Window allows you to make changes and preview them before saving them.
7. Show Bollinger Bands: To show the Bollinger Band on the chart, click in the check box.  You may also select this indicator by using the right-click menu for the Chart Window.
8. Restore Defaults:  To restore the Bollinger Band Indicator to the Default Options, click the Restore Defaults button.
9. Documentation:  This box contains instructions for the Bollinger Band Indicator.