Description

Bolliger bands utilize three curves:

• An n–period SMA in the middle.
• An upper band which is the n-period SMA plus K standard deviations, where K is a constant.
• An lower band which is the n-period SMA minus K standard deviations, where K is a constant.

Bolliger bands were developed by John Bollinger

Interpretation

Because standard deviation is a volatility measure, the two bands will contract when volatility is low and expand when volatility is high.

When the price curve touches or breaches the upper band this is as seen as a sell signal, since it is believed that the currency is overbought. When the price curve touches or breaches the lower band this is as seen as a buy signal, since it is believed that the currency is oversold.

Formula

Bollinger bands are usually set to two standard deviations away (upper and lower) from the SMA.