BB (Bollinger Band)

BB (Bollinger Band) is a popular indicator that was developed by John Bollinger in early 1980's and presented in his book Bollinger Capital Management.

BB is intended for monitoring of the market price volatility. Volatility takes place when the price deviates from its average level and starts moving up and down generating uptrends and downtrends. The greater the deviation is, the higher the volatility is.
Hence, for monitoring the market volatility, BB calculates average price and standard deviation volumes. The values are calculated automatically (the mathematical formulas are provided later in the article) and allow drawing three lines (bands) on a chart that are:

• Average line (blue by default) - is a 20-period (by default) MVA indicator's line.
• Band lines (red by default) - are two lines set N number of standard deviations (two by default) above (Top line) and below (Bottom line) the Average line.

On the price chart, the Band lines deviate from the Average line when the market volatility increases and, conversely, the Band lines move towards the Average line when the market volatility decreases. Note that the indicator can be drawn on the market price chart as well as in an additional area below it.

On the following picture, you can see an example of the BB indicator drawn on the market price chart.



BB is not meant to be used as a stand-alone indicator. John Bollinger recommends using it in conjunction with trend, volume, and other indicators as an additional confirmation of their signals.

Please remember that as its Data Source the indicator uses the historical data and provides the information that belongs to the past. A trader can only suppose that the market situation will continue to develop in the same way for some time in the future and try to use the supposition appropriately.

To apply a BB indicator to a chart, a trader needs to follow the procedure common to all Marketscope indicators. For more information, see the Add Indicator article.

During the procedure, a trader can customize the indicator by specifying its parameters in the Properties dialog box. For more information, see the Change Indicator Properties article.

The parameters fall into two groups:

• Calculation - the parameters needed to calculate an indicator's prices.
• Style and Appearance - the parameters needed to specify the way an indicator appears on a chart.

BB has the following Calculation parameters:

• Number of periods - the parameter allows specifying the number of periods, over which the MVA (the Average line) and standard deviations (used to form the Band lines) values are to be calculated. The possible parameter's values are from 1 through 10,000. The default value is 20. The smaller the number is, the more sensitive to the market price changes the BB indicator is, and vice versa. The most popular is the default value - 20.
• Number of standard deviations - the parameter allows to specify the number of standard deviations, over which the Band lines are to be shifted away from the Average line. The possible parameter's values are from 0.0001 through 1,000.0. The default value is 2.0. The smaller the number is, the closer the Average line the Band lines are, and vice versa. The most popular is the default value - 2.0.

The parameters are available on the Parameters tab of the BB Properties dialog box under the Calculation heading.

BB has the following Style parameters:

• Band lines color - the parameter allows to specify the color of both Band lines at one procedure. By default, the color is green.
• Band lines width - the parameter allows to specify the width of both Band lines at one procedure. The default value is 1.
• Band lines style - the parameter allows to specify the style of both Band lines at one procedure. The default value is Solid line.
• Hide average line - the parameter allows to show or hide the Average line. The possible values are Yes and No. The default value is No.
• Average line color - the parameter is similar to the Line color parameter of all the other standard indicators of Marketscope. By default, the color is blue.
• Average line width - the parameter is similar to the Line width parameter of all the other standard indicators of Marketscope. The default value is 1.
• Average line style - the parameter is similar to the Line style parameter of all the other standard indicators of Marketscope. The default value is Solid line.

The parameters are available on the Parameters tab of the BB Properties dialog box under the Style heading.

When a BB indicator is drawn on a chart, a trader can analyze its information and try to interpret it correctly. BB does not produce direct trading signals. It is true that BB reflects the market price direction with its Average line and volatility with its upper and lower Band lines. Prices are considered to be relatively high when they are above the upper (Top) band line and relatively low when below the lower (Bottom) band line. Likewise, when prices continually touch the upper (Top) band line, they are thought to be overbought and, conversely, when they continually touch the lower (Bottom) band line, the prices are thought to be oversold. However, to be treated as trading signals, these indications should be confirmed by some other technical analysis tools before trader decides to take a trading action.

The BB indicator's values are calculated automatically using the following formulas:

AL = MVA

TL = AL + (SD x N)

BL = AL - (SD x N)

where:
AL - is the Average line value of the period being calculated.
MVA - is the MVA indicator's value of the period. The number of periods, over which it is to be calculated, is specified by the Number of periods parameter.
TL - is the Top band line value of the period being calculated.
SD - is the standard deviation value of the period being calculated. The number of periods, over which it is to be calculated, is specified by the Number of periods parameter.
N - is the number of standard deviations, over which the line is shifted above or below the Average line.
BL - is the Bottom band line value of the period being calculated.