Bollinger Bands is a versatile tool combining moving averages and standard deviations and is one of the most popular technical analysis tools available for traders. There are three components to the Bollinger Band indicator:
- Moving Average: By default, a 20-period simple moving average is used.
- Upper Band: The upper band is usually 2 standard deviations (calculated from 20 periods of closing data) above the moving average.
- Lower Band: The lower band is usually 2 standard deviations below the moving average.
Bollinger Bands (in blue) are shown below in the chart of the E-mini S&P 500 Futures contract:
There are three main methodologies for using Bollinger Bands, discussed in the following sections:
- Playing the Bands
- Bollinger Band Breakouts
- Option Volatility Strategies