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Bollinger bands

Bollinger bands is technical analysis indicator which is using moving average as basis. Two additional lines are generated by the standard deviation. So the 95% of prices belong to the interval around a moving average, between two lines.

Bollinger band lines are calculated by formulas:

Middle line (ML) = Simple Moving Average (SMA (N))

Top line (TL) = ML + k*StDev

Bottom line (BL) = ML - k*StDev

StDev = StDev

For N is usually taken value of 20 and for k value of 2.

Bollinger bands
Bollinger bands


Bollinger bands are mostly used to determine if certain security is overbought or oversold. If price comes closer to the top the, security is overbought and if comes closer to the bottom line security is oversold. It also may happen that after approaching to top or bottom line price still continues its previous course. So it is important to confirm the signals with some other signs of trend reversal.

There is also another interpretation of bollinger bands: if price falls below the bottom line, and then rises and crosses middle line, it is expected that prices will then reach the level of the top line. Same goes for top line: if price rises above top line, and then falls and crosses middle line, it is expected to fall all to the bottom line.


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