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Introduction |
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Created by John Bollinger, the Bollinger Bands indicator serves as a measure of volatility. Overlaid with the price action, the indicator can give a large amount of information.
The Bollinger Bands indicator is similar to the Moving Average Envelope indicator in that they both form upper and lower bands around a moving average. Bollinger Bands go a step further than MA Envelopes in that they incorporate statistics and the concept of standard deviations to form their upper and lower limits. Bollinger created his bands at a time when many analysts did not understand that volatility was a dynamic variable that fluctuated and not a static one (like pecentage based envelopes).
The indicator consists of three lines; the middle line (a moving average), the higher band and the lower band. An example of the indicator is depicted above in figure 1.
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