Bollinger Bands is a versatile tool combining moving averages and standard deviations and is one of the most popular technical analysis tools. 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 traders might use the Bollinger Bands for; these interpretations are discussed in the following sections:
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