How Bollinger Bands Indicator Works

Bollinger Bands indicator calculations uses standard deviation to plot the bands, the default value used is 2.

Bollinger Bands Forex Calculation

The middle Bollinger band indicator line is a simple moving average

The upper Bollinger band line is: Middle line + Standard Deviations

The lower Bollinger band line is: Middle line - Standard Deviation

Bollinger bands indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average and the bands are then overlaid on the chart price action.

Standard Deviation is a statistics concept. It originates from the notion of normal distribution. One standard deviation away from the mean either plus or minus, will enclose 67.5 % of all price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all price action movement.

This is why the Bollinger Bands indicator uses the standard deviation of 2 which will enclose 95 % of all price action. Only 5 % of chart price action will be outside the 3 forex bollinger bands, this is why traders open or close forex trades when price hits one of the outer Bollinger Bands.

The Bollinger Bands indicator main function is to measure price action volatility. What the Bollinger bands upper and lower limits try to do is to confine price action of up to 95 percent of the possible closing prices.

Bollinger Bands indicator compares the current closing price with the moving average of the closing price. The difference between these two prices is the volatility of the current price compared to the moving average. The price volatility will increase or decrease the standard deviation of the bollinger bands forex trading indicator.