# Bollinger Band

# Bollinger Band

Developed by John Bollinger, the Bollinger Band shows the price of the stock with an upper and lower band (standard deviation) shown with a 21-day simple moving average.

Standard Deviation is a model of volatility.

- larger volatility is presented with a larger band (more room for growth, but equally for loss)
- smaller band means less volatile.

## Oversold & Overbought

Some people believe that:

- as the price of the stock moves to the upper band == Overbought
- the more it moves to the lower band == Oversold

## The Squeeze

When the bands contract, this is called a squeeze.

- period of lower volatility
- many take as a signal for future increased volatility and trading

When the bands move further apart

- larger risk for them to move apart again
- may be a good time to exit a trade.

These conditions are not trading signals. They don’t indicate when the change will take place, or the direction they’ll move.

## The math

Bollinger Bands consist of:

- an N-period moving average (MA)
- an upper band at K times an N-period standard deviation above the moving average (MA + Kσ)
- a lower band at K times an N-period standard deviation below the moving average (MA − Kσ)

N and K are usually 20 and 2.

Other averages can be used, such as the exponential moving average.

## Effectiveness

A 2007 study that spanned from 1995 to 2005 showed no evidence of consistent performance over the standard “buy and hold” approach, but a “contrarian Bollinger Band” (reversal of the strategy) yielded positive results.

The band may be more effective in Chinese markets.