Bollinger Bands (BB) are a technical indicator also used in the Forex market, designed to identify the price channel within which the price is expected to move, the direction of the price trend, as well as support and resistance levels of an asset.
In many ways, Bollinger Bands are similar to the Envelopes indicator. However, while Envelopes are based on a fixed distance from a Moving Average, Bollinger Bands are calculated using distances equal to a certain number of standard deviations, reflecting market volatility. As a result, the channel width is dynamic and adjusts according to market conditions. When price movement is uncertain, the bands widen, allowing for movement in various directions; when the market is stable, the bands narrow, maintaining a clear trend direction.
Bollinger Bands IndicatorFeatures of the Bollinger Bands Indicator
Traders using BB highlight several key features:
- Sharp price impulses often occur after the bands narrow, indicating a drop in market volatility. Economically, this suggests traders are preparing to move in one direction.
- If price movement is strong enough to break beyond the Bollinger Bands, it usually signals the continuation of the current trend.
- Price movements that start near one band typically reach the opposite band.
Formula for Calculating Bollinger Bands
The Bollinger Bands indicator consists of three lines.
1. The middle line is a simple Moving Average (MA).
ML = SUM [CLOSE, N]/N
2. The upper line (Top Line, TL) is the middle line shifted upward by a certain number of standard deviations (D).
TL = ML + (D*StdDev)
3. The lower line (Bottom Line, BL) is the middle line shifted downward by the same number of standard deviations as the upper line.
BL = ML – (D*StdDev)
Where:
- SUM(…, N) — sum of price values over N periods;
- CLOSE — closing price of the bar;
- N — number of periods for calculation;
- SMA — simple moving average;
- SQRT — square root;
- StdDev — standard deviation calculated as:
StdDev = SQRT(SUM[(CLOSE – SMA(CLOSE, N))^2, N]/N)
