How Bollinger Bands Technical Indicator Works

Bollinger Bands indicator calculations uses standard deviation to draw the bands, the default value used is 2.

Bollinger Bands Calculation

The middle Bollinger band indicator line is a simple moving average

The upper Bollinger band line is: Middle line + Standard Deviation

The lower Bollinger band line is: Middle line - Standard Deviation

Bollinger bands indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average and the bands are then overlaid on the chart crude price action.

Standard Deviation is a statistics concept. It originates from the notion of normal distribution. One standard deviation away from the mean either plus or minus, will enclose 67.5 % of all crude price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all crude price action movement.

This is why the Bollinger Bands indicator uses the standard deviation of 2 which will enclose 95 % of all crude price action. Only 5 % of chart crude price action will be outside the 3 oil bollinger bands, this is why oil traders open or close crude trades when crude trading price hits one of the outer Bollinger Bands.

The Bollinger Bands indicator main function is to measure crude price action volatility. What the Bollinger bands upper and lower limits try to do is to confine crude price action of up to 95 percent of the possible closing prices.

Bollinger Bands indicator compares the current closing crude trading price with the moving average of the closing crude trading price. The difference between these two crude trading prices is the volatility of the current crude trading price compared to the moving average. The crude trading price volatility will increase or decrease the standard deviation of the bollinger bands indicator.