| Bollinger Bands | |
|
|
Created by John Bollinger, Bollinger Bands are similar to moving
average envelopes. The difference between Bollinger Bands and
envelopes is envelopes are plotted at a fixed percentage above
and below a moving average, whereas Bollinger Bands are plotted
at standard deviation levels above and below a moving average.
Since standard deviation is a measure of volatility, the bands
are self-adjusting, widening during volatile markets and
contracting during calmer periods.
As with moving average envelopes, the basic interpretation of
Bollinger Bands is that prices tend to stay within the upper and
lower band. The distinctive characteristic of Bollinger Bands is
that the spacing between the bands varies based on the volatility
of the prices. During periods of extreme price changes (i.e.,
high volatility), the bands widen to become more forgiving.
During periods of stagnant pricing (i.e., low volatility), the
bands narrow to contain prices.
The first argument in this study is the number of days. The
second argument is the number of standard deviations used to
create the envelope.