Bollinger Bands Trading Strategy : They will use two parameters as period and standard deviation, stdDev.They are used in pairs of both upper, lower bands and in conjunction with a moving average. So the pair of bands is not intended to use on its own. We use pairs to confirm the signal given with other indicators. They will show the level of different high/low-security price that has reached in a particular duration. The bandwidth gets widens and narrow depending on volatility. A band is called a technical analysis tool defined by a set of trendlines. They are plotted by two standard deviations away from a simple moving average of a security price which can be adjusted to user preference.
During the tight, there is low volatility that raises the likelihood of a sharp price in either direction. Here the price has a tendency to bounce within the band envelope as one band then moves to another band. We can use these swing to help identify potential profit targets.
Calculation : The calculation of Bollinger Bands is computed by a simple moving average of the security by using a 20-day SMA. The 20-day moving average goes out of the closing prices for the first 20 days as a data point. The next data point will drop the earliest price then add the price on day 21. They will take the average standard deviation of the security price obtained in the next step. The standard deviation is a mathematical measurement of average variance and feature in statistics, accounting, and finance.
view more\begin{aligned}&\text{BOLU}=\text{MA}(\text{TP},n)+m*\sigma[\text{TP},n ] \\ &\text{BOLD} = \text {MA} ( \text {TP}, n ) - m * \sigma [ \text {TP}, n ] \\ &\textbf{where:} \\ &\text {BOLU} = \text {Upper Bollinger Band}\\&text{BOLD}=\text{Lower Bollinger Band}\\&\text{MA}=\text{Moving average}\\&\text{TP(Typical price)}=(\text{High}+\text{Low}+\text{Close})\div3 \\ &n = \text {Number of days in smoothing period (typically 20)} \\ &m = \text {Number of standard deviations (typically 2)} \\ &\sigma [ \text {TP}, n ] = \text {Standard Deviation over last } n \text{ periods of TP} \\ \end{aligned}BOLU=MA(TP,n)+m∗σ[TP,n]BOLD=MA(TP,n)−m∗σ[TP,n]where:BOLU=Upper Bollinger Band BOLD=Lower Bollinger BandMA=Moving averageTP (typical price)=(High+Low+Close)÷3n=Number if days in smooth period()typically 20)m=Number of standard deviation(typically2) σ[TP,n]=Standard Deviation over last n periods of TP
When Bollinger Bands are applied to a chart then trader will see three lines. The width of the band is determined by the standard deviation. The standard deviation refers to the volatility of the instrument's price movement.
The bands are used to analyze the volatility and trend strength useful when opening/ closing trade quickly in a volatile market as forex scalping. They will appear as a three-line chart. The middle line is the instrument moving average, while upper and lower lines are based on the standard deviation of the price movements.
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