Metatrader indicator Bollinger Bands (BB)
Bollinger bands technical indicator is akin to envelopes. With the slight difference in the fact that bands of envelopes are plotted at a fixed distance as percentage slightly away from the moving average. These bands are also plotted with a certain number of standard deviations, which are away from these. Standard deviation is known as a measure of volatility, which compels Bollinger bangs to adjust themselves in tune with the market conditions. The widening of bands occur when the market becomes more volatile and their contract during times of lesser volatile periods.
Bollinger brands are plotted on the price charts, but they can be additionally mentioned on the indicator charts or custom indicators. Like in the case of envelopes the interpretation of Bollinger bands is based on the fact of their prices tending to remain between the maximum and the minimum line of the bands. In periods of considerable price change that is when high volatility occurs their results result in widening of bands, which give a lot of room for price movements. During stand still periods or low volatile ones contraction of band occurs by keeping their limits under control.
The following traits are unique to the Bollinger band:
- Sudden changes in prices after the bands contraction because of decrease in volatility.
- If prices go through the upper band, a continuation of the current trend should be expected.
- If the pikes and hollows are monitored by pikes and hollows inside the band, an inverted trend will occur.
- The price movement that has started from one of the band’s lines will tend to reach the opposite ones. This observation is essential for forecasting price guideposts.
Calculation
Bollinger Bands formation happens by three lines. The middle line (ML) is a moving average, which is denoted in the formula:
ML = SUM [CLOSE, N]/N
The top line (TL) is the same as the middle line with standard deviations (D) higher than the ML which should be denoted as:
TL = ML + (D*StdDev)
The bottom line (BL) is the middle line kept down by the same number of standard deviations. This should be denoted as:
BL = ML – (D*StdDev)
It is advised for usage of 20-period simple moving average as the middle line, and plot top and bottom lines, two standard deviations are indicated, which are away from the main average. Moving averages of less than 10-periods are of little effect.
Thus, Bollinger Bands also have the utility of providing volatility factors for price increase or decrease in the stock markets. These are useful for deciding on the time as to when to buy and when to sell? For enabling proper profitability in the deals. For enjoyment of good returns and windfall gains during the times of volatility, these indicators become very useful and helpful.
This entry was posted on Thursday, July 31st, 2008 at 8:11 am and is filed under metatrader indicator. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
