How Bollinger Bands Oil Technical Indicator Works

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

Bollinger Bands Crude Oil Trading Calculation

The middle Bollinger band technical indicator line is a simple moving average

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

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

Bollinger bands oil 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 oil chart crude oil 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 crude oil price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all crude oil price action movement.

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

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

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