Bollinger Bands
CHART - FTSE 100
The norm is to use a 20-period moving average for the middle band and two standard deviations to calculate the upper and lower band. For example, if we are working with a daily chart, we will use a 20-day moving average. The above chart shows the FTSE 100 daily chart with Bollinger Bands. The middle band is the 20-day moving average Upper band = middle band + (2 x standard deviation) Lower band = middle band – (2 x standard deviation) Because the standard deviation is a measure of volatility, the bands widen and contract depending on the level of volatility. In periods of low volatility the bands will contract and in periods of high volatility they will widen. As a general rule, the price will fluctuate between the upper and lower band, however, and importantly, there are situations when a move to a particular level will produce a buy or sell signal.
March 2013
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