# 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...