Bollinger Bands are the trading channels that follow the price changes. Generally, the trading channels are drawn by shifting a moving average up or down in a certain percentage. In Bollinger Bands, the upper and lower limits of the channels are drawn by taking a certain “standard deviation” of a moving average. To get an optimal outcome, various moving average and standard deviation numbers can be tried. Nevertheless, Bollinger recommends a 20-day moving average and two standard deviations. Again, according to Bollinger, the channels created by moving averages below 10 days don’t work well.
– Sharp price changes usually occur after the narrowing of the tapes.
– The price-out of the band means that the current trend will continue.
– Follow-up of peaks, and peaks occurring in the band at the bottom of peaks occurring outside the band, is a sign of a possible trend change.
– Movement within a band is expected to continue until the price reaches the other band.
The envelope consists of two moving averages. The first moving average is shifted in the upward direction and the second in the downward direction, thereby forming a channel. The envelope defines the normal trading range of the price of a share. When the price reaches the upper belt, the “sell” signal is received when it reaches the bottom belt. The optimal horizontal shift percentage depends on the volatility of the stock (variability). The higher the share volatility, the higher the percentage of vertical scrolling.
The logic behind the Envelope is:
Buyers and sellers push the price towards the endpoints (top and bottom bands). However, prices usually stabilize at more realistic levels.
Standard deviation is a statistical measure of price fluctuations. The first type of information given (closure price, indicator, etc.) is taken as a simple moving averaging overtime period (X). Then, for each predetermined period X, the frames of the differences between this information and its moving average are collected. This sum is divided into X and the square root of the result is taken.
The standard deviation indicator is generally used as a component of the indicator rather than as a stand-alone tool. For instance, Bollinger Bands are calculated by adding the standard deviation of the stock to a moving average.