1. Understanding the Basics and Composition of Bollinger Bands
Bollinger Bands are a highly practical and straightforward technical indicator. For investors familiar with cryptocurrencies and the stock market, Bollinger Bands are not unfamiliar. They not only help investors analyze market trends and assess price movements but also assist in identifying buying and selling points in the market. Let’s delve into Bollinger Bands together with Small K.
2. The Origin of Bollinger Bands
Bollinger Bands, also known as price channel lines, are named after their creator, John Bollinger. John Bollinger, a stock market analyst, developed this technical indicator based on the principles of standard deviation in statistics. It has been widely applied in investment markets to observe price fluctuations. John Bollinger believed that stock price fluctuations revolve around a central value, such as a moving average, within a certain range or area. Bollinger Bands introduce the concept of a “price channel” under this premise. By calculating and plotting the channel, they demonstrate the fluctuation of stock prices within the channel’s range. The width of the channel varies with the magnitude of stock price fluctuations. At the same time, the channel serves as a means of adjustment for stock prices. When stock prices deviate too far from the channel, they automatically readjust back into the channel. Therefore, through Bollinger Bands, investors can observe the fluctuation of stock prices clearly and intuitively, enabling them to make judgments about future price trends. Consequently, Bollinger Bands have gradually become a popular technical indicator widely used in investment markets.
3. Calculating Bollinger Bands
The primary purpose of John Bollinger’s design of Bollinger Bands was mean reversion. If stock prices are running along the upper band, it indicates an overvaluation and a tendency to revert to the mean. If stock prices are running along the lower band, it indicates an undervaluation and a tendency to revert to the mean. With this in mind, Bollinger introduced three lines: the upper band (UP), the middle band (MB), and the lower band (DN). The middle band is simply the N-day moving average. Then, using the concept of standard deviation from statistics, Bollinger calculated the upper and lower bands. It is worth noting that, like other technical indicators, the calculation results differ depending on the chosen calculation period. Bollinger Bands include daily Bollinger Bands, weekly Bollinger Bands, monthly Bollinger Bands, and even minute Bollinger Bands. However, in practical investments, the most commonly used are daily and weekly Bollinger Bands. Although they have different calculation periods, the calculation method is essentially the same. Here, we will use daily Bollinger Bands as an example to explain the calculation method. The formula for calculating daily Bollinger Bands is as follows:
Middle Band = N-day moving average
Upper Band = Middle Band + K times N-period standard deviation
Lower Band = Middle Band – K times N-period standard deviation
In general, the values of K and N are 2 and 20, respectively, indicating a 20-day moving average and 2 times the standard deviation of the 20-day period. Once we understand the calculation formula, it is unnecessary for ordinary investors to perform the actual calculations.
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