V. 20:1 (78-79): Working Money: Bollinger Bands by Amy Wu

Bollinger Bands by Amy Wu

Here’s a useful and classic indicator.

Bollinger Bands are a type of envelope analysis that uses standard deviations in calculation rather than a fixed percentage. Created by John Bollinger, the bands are displayed as upper and lower limits (derived from the security price’s standard deviation). A third, middle band is a moving average, usually calculated using 20 days. Adding two standard deviations to the middle band creates the upper band. Likewise, the lower band is found by subtracting two standard deviations from the middle band.

Standard deviation is a tool commonly used in statistics to find out how much a sample deviates from its mean. It is calculated by finding the n-period simple moving average of a security price (or other data), taking the sum of the squares of the difference between the data and its moving average, and then dividing this sum by n. This is called the variance. The square root of the variance is the standard deviation. To get two or three standard deviations, simply multiply that coefficient to your original standard deviation.