Visually speaking the indicator consists of two lines that frame the price from above and below. They can be viewed as dynamic lines of resistance and support and most of the time they are plotted away from from the price.
The width of the Bollinger Bands itself depends on the volatility – when the market is more volatile, that width increases automatically, when it’s less volatile it decreases – also automatically. The main rule is that 95% of the price movement is always contained within the Bollinger Bands and about 5% remains outside of them.
The Bollinger Bands indicator consists of three lines:
-The middle line is a simple moving average.
-The upper band is the same moving average that is plotted a number of standard deviations away, usually 2.
-The lower band is the same moving average, plotted a number of standard deviations away, usually 2, but below the middle line.
If the indicator’s properties are set properly, then the middle line can be considered as a great level of support and resistance, and the bands can serve as targets of opened positions.
To be continued...
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