How Bollinger Bands Trading Indicator Works

Bollinger Bands Stock Index indicator calculations uses standard deviation to plot the bands, default value used is 2.

Bollinger Bands Stock Index Calculation

The middle Bollinger band line is a simple moving average

The upper Bollinger band line is: Middle line + Standard Deviation

The lower Bollinger band line is: Middle line - Standard Deviation

Bollinger bands Stock Index indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average & the bands are then overlaid on the Indices trade chart price action.

Standard Deviation is a statistics concept. It originates from the notion of normal distribution. One standard deviation away from the mean either plus or minus, will enclose 67.5 % of all Indices price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all Indices price action movement.

This is why the Bollinger Bands Stock Index indicator uses the standard deviation of 2 which will enclose 95 % of all Indices price action. Only 5 % of Stock Indices trade chart price action will be outside the 3 Stock Index bollinger bands, this is why Stock Index traders open or close Indices trades when price hits one of the outer Bollinger Bands.

The Bollinger Bands Stock Index indicator main function is to measure Indices price action volatility. What the Bollinger bands upper and lower limits try to do is to confine Indices price action of up to 95 percent of the possible closing Stock Indices prices.

Bollinger Bands Stock Index indicator compares the current closing price with the moving average of the closing price. The difference between these two Stock Indices prices is the volatility of the current Stock Indices price compared to the moving average. The Indices price volatility will increase or decrease the standard deviation of the bollinger bands Stock Index indicator.