BOLLINGER BANDS FORMULA: Middle Band = 20-day simple moving average (SMA) Upper Band = 20-day SMA + (20-day standard deviation of price x 2) Lower Band = 20-day SMA - (20-day standard deviation of price x 2)

Lines in Graph Price Line in Candle Sticks Middle Band Line Upper Band Line Lower Band Line Bollinger Bands Calculation Example : Assume a 5 bar Bollinger band with 2 Deviations, and assume the last five closes were 25.5, 26.75, 27.0, 26.5, and 27.25. Calculate the simple moving average: 25.5 + 26.75 + 27.0 + 26.5 + 27.25 = 133.0 133.0 / 5 = 26.6 Next, for each bar, subtract 26.6 from the close and square this value: 25.5 - 26.6 = -1.1 26.75 - 26.6 = 27.0 - 26.6 = 0.4 26.5 - 26.6 = 0.1 27.25 - 26.6 = squared = 1.21 0.15 squared = squared = 0.16 squared = 0.01 0.65 squared = 0.023 0.423

Add the above calculated values, divide by 5, and then get the square root of this value to get the deviation value: 1.21 + 0.023 + 0.16 + 0.01 + 0.423 = 1.826 1.826 / 5 = 0.365 Square root of .365 = 0.604 The upper Bollinger band would be 26.6 + (2 * 0.604) = 27.808

The middle Bollinger band would be 26.6 The lower Bollinger band would be 26.6 - (2 * 0.604) = 25.392

Bollinger Bands Calculation Example in Excel :

An increase in the moving average period would automatically increase the number of periods used to calculate the standard deviation and would also warrant an increase in the standard deviation multiplier.

For signals, BUY & SELL

Some traders exit their long or short entries when price touches the 20-day moving average. Strong uptrend & downtrend Prices tend to stay in the upper half, where the 20-period moving average (Bollinger Band centerline) acts as support for the price trend.

Breakout of Support & Resistance raising signal

Bollinger Band Breakout through Resistance Buy Signal Bollinger Band Breakout through Support Sell Signal

Bollinger Bands can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend. W-Bottoms = Down Trend (lower band) = Two reaction low = Second low is lower than the first low

Four steps to confirm a W-Bottom with Bollinger Bands

(i) Reaction low forms. This low is usually, but not always, broke below the lower band (ii) Bounce towards middle band. (iii) New low price, above the lower band (iv) Strong move off the second low and a resistance break.

M-Top = Reaction highs are not always equal = First high can be higher or lower than the second high

Opposite of the W-Bottom

Looking for signs of non-confirmation when a security is making new highs Occurs with three steps:

(i) Reaction high above the upper band (ii) There is a pullback towards the middle band (iii) Prices move above the prior high, but fail to reach the upper band. This is a warning sign (iv) Final confirmation comes with a support break or bearish indicator signal.

The M-Top was confirmed with a support break two weeks later.

Conclusions:

As with other indicators, Bollinger Bands are not meant to be used as a stand alone tool. Chartists should combine Bollinger Bands with basic trend analysis and other indicators for confirmation.

Bollinger Bands and stochastics Stochastics and Bollinger Bands create a preferred combination of technical indicators to find overbought and oversold territory. When both the Bollinger Bands and Stochastic indicator curve up at the bottom near a low,

it is often a buy indication, while the opposite is true for sell signals. Momentum indicators mixed with Bollinger Bands are very common because of the similarities in the indicators. For day trading, a similar mix of momentum and Bollinger Band proves to be very profitable.