How Bollinger Bands Stock Indicator Works
Bollinger Bands stock indicator calculations uses standard deviation to draw the bands, the default value used is 2.
Bollinger Bands Stocks Calculation
The middle Bollinger band 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 stock 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 stock chart stocks 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 stocks price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all stocks price action movement.
This is why the Bollinger Bands stock indicator uses the standard deviation of 2 which will enclose 95 % of all stocks price action. Only 5 % of stock chart stocks price action will be outside the 3 stock trading bollinger bands, this is why stock traders open or close stocks trades when stocks price hits one of the outer Bollinger Bands.
The Bollinger Bands stock indicator main function is to measure stocks price action volatility. What the Bollinger bands upper and lower limits try to do is to confine stocks price action of up to 95 percent of the possible closing stock prices.
Bollinger Bands stock indicator compares the current closing stocks price with the moving average of the closing stock price. The difference between these two stock prices is the volatility of the current stocks price compared to the moving average. The stocks price volatility will increase or decrease the standard deviation of the bollinger bands stock indicator.