Bollinger Bands

Bollinger Bands is a technical analysis tool used in stock trading to measure the volatility of a particular security or stock. The bands are created by plotting two standard deviations away from a simple moving average (SMA) of the stock's price.

The upper band is plotted by adding two standard deviations to the SMA, while the lower band is plotted by subtracting two standard deviations from the SMA. The resulting bands create a channel that moves with the price of the stock.

Traders often use Bollinger Bands to identify potential trading opportunities, as a stock's price tends to move within the channel created by the bands. A break above or below the bands can indicate a potential trend reversal, and traders may use this information to enter or exit positions in the stock. Additionally, traders may use Bollinger Bands to gauge the overall volatility of a stock, with wider bands indicating higher volatility and narrower bands indicating lower volatility.

When a price during a trading session is crossing a lower Bollinger Band a buy signal is generated. A sell signal is generated when a price during a trading session is crossing a upper Bollinger Band.

The strategy is based on an assumption that when stock price is touching a lower Bollinger band, it is usually oversold. Likewise when the price is touching the upper Bolling Band the stock is likely to be overbought.

Formula

IF C(t) >= BBUPPER( m,d )
THEN GO SHORT
ELSE
IF C(t) <= BBLOWER( m,d )
THEN GO LONG
BBUPPER is upper Bollinger Band;
BBLOWER is lower Bollinger Band;
C(t) is days closing price;
and m is averaging periods, d - deviations;
e.g. m = 14, d = 2

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