Bollinger Band and Stochastic

Bollinger bands

Graphically, Bollinger Bands are two lines that limit the dynamics of prices from above and from below, respectively. These are original lines of support and resistance, which most of the time are at levels remote from the price.

Bollinger bands are similar to envelopes of moving averages. The difference between them lies in the fact that the boundaries of envelopes are located above and below the moving average curve at a fixed distance expressed in percent, while the boundaries of the Bollinger bands are constructed at distances equal to a certain number of standard deviations. Since the magnitude of the standard deviation depends on volatility, the bands themselves adjust their width: it increases when the market is unstable, and decreases in more stable periods.

The main rule in the construction of Bollinger lines is the following statement: about 5% of the price should be outside these lines and 95% inside.

Bollinger bands are formed from three lines. The average line is the usual moving average. The top line is the same middle line, shifted upward by a certain number of standard deviations (for example, by two). The bottom line is the middle line, shifted down by the same number of standard deviations.

The uniqueness of Bollinger's ranges is that their width changes in response to a change in market volatility. The Bollinger Band is constructed as a band around the middle one, but the bandwidth is proportional to the standard deviation from the moving average for the analyzed period. When there is a lot of volatility in the market, for example, at the time of news release, the band expands when the market lulls in the market.

As for all other indicators, I recommend analyzing the BB together with other indicators. The meaning of the indicator BB - determine the sharp deviations from the average rate of the current trend of the currency pair. If the BB is matched correctly, its moving average (central line) is a good level of support/resistance, and the boundaries of the BB can serve as targets when opening positions. Usually, the BB bands are placed on the price chart, but they can also be applied to any indicator that is drawn in a separate window, for example, an oscillator.

Bollingers define natural extremes in an evolving trend. If Bollinger tends to go up, the price makes a rebound until a powerful enough force stops the price move. The stagnation zone is formed below the upper or above the lower Bollinger. The state of stagnation can continue until Bollinger turns around and begins, opening up, to move away from the price bar, which will indicate that resistance is overcome. Price can shoot towards the current trend and stick to the edge of Bollinger. However, one should not lose sight of the fact that the final price movement depends on all levels of support/resistance, and not only on those with which the explosives are associated.

The developer himself notes the following features of the Bollinger bands:

• Sharp price changes usually occur after narrowing the band, corresponding to a decrease in volatility.
• If prices go beyond the band, one should expect the continuation of the current trend.
• If the peaks and depressions outside the band are followed by peaks and depressions inside the strip, a reversal of the trend is possible.
• The price movement, which starts from one of the borders of the strip, usually reaches the opposite boundary. The latter observation is useful for forecasting price benchmarks.