Indicators for Traders: Bolinger Bands

Expanding on our technical indicator library, in this article, we are going to examine the Bolinger Bands.

The image has been taken from https://www.tradingview.com/

Bollinger bands are calculating the standard deviation inside a certain time frame and it also includes a simple moving average in the middle of the bands. This gives us a blink of the historical volatility of the asset inside a time frame.

The calculation of standard deviation that creates the Bolinger Bands is better described in the article “A Relatively Quick Statistics Crash Course — Part 1”.

It is a lagging indicator meaning that it calculates historical data.

The basic premise is that when the price is outside of the bands, it has been extended way too far out, and one can expect to move back to the mean, and thus it can be used in a mean reversion strategy.

The image has been taken from https://en.wikipedia.org/

An important note is that when the price is at the mean level, it has a 65.2% probability if the Bollinger band is set to 1 standard deviation and a 95.4% for 2 standard deviation probability that the price will stay within the bands if the prices are measured as normally distributed.

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