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How Bollinger Bands Works

The Bollinger Bands indicator uses standard deviations to create the bands. It sets the default at 2.

Bollinger Bands Calculation

middle Bollinger band technical indicator line is a simple moving average

The upper band indicator is: Middle line + Standard Deviations

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

The Bollinger Bands indicator usually uses a 20-period moving average MA to figure out the Bollingers, and then the bands are put on top of the price movements on the chart.

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

Using Bollinger Bands for Stock Trading - Bollinger Bands account for price movements within two standard deviations, capturing 95% of all price action. Only 5% falls outside these bands, making them useful for determining potential entry or exit points when prices approach the outer bands.

Bollinger Bands track price volatility. Their upper and lower lines hold about 95% of closing prices.

Bollinger Bands assess the current closing price in relation to the moving average (MA) of the closing price. The variance between these two figures indicates the market price's volatility when compared to the MA. Changes in price volatility will influence the standard deviations of the Bollinger Bands trading indicator.

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