Bollinger Bands were developed by John Bollinger and introduced in the late 1980's. Bollinger Bands serve these primary functions:
- To provide a relative definition of high and low
- To identify periods of high and low volatility
- To identify periods when prices are at extreme levels
They do this by using standard deviation as a measure of volatility. Since standard deviation is a measure of volatility, Bollinger Bands are self-adjusting; They widen during periods of higher volatility and contract during periods of lower volatility. Bollinger Bands consist of 3 bands designed to emcompass the majority of a trading instrument's price action. The middle band is a basis for the intermediate-term trend, typically a 20-periods simple moving average, that also serves as the base for the upper and lower bands. The upper band's and lower band's distance from the middle band is determined by volatility. Typically, the upper band is plotted +2 standard deviations above the middle band while the lower band is plotted -2 standard deviations below the middle band.
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