The Bollinger Band, developed by John Bollinger, is widely used by traders to trade the market effectively. The Bollinger Band is constructed using 3 lines; the upper Bollinger band, the Simple Moving Average line (SMA) and the lower Bollinger band. The upper and lower Bollinger bands are usually placed at a distance of 2 standard deviations above and below the SMA respectively. Standard deviation is a mathematical term in which the value is proportional to the volatility of the price movement. SMA line is the averaging of the close price over a certain number of days. Hence, when the stock is trading sideway or the price volatility is low, the upper and lower bands will converge toward the SMA line. On the other hand, the upper and lower bands will begin to widen and move away from the SMA line when there is substantial fluctuation in the stock price. This article will look in the different ways that Bollinger Bands are used.
