a middle band being an N-period simple moving average (MA)
an upper band at K times an N-period standard deviation above the middle band (MA+Ksigma)
a lower band at K times an N-period standard deviation below the middle band (MA-Ksigma)
Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed.
So what does the “n” in n period represent? Is it just giving the SMA a designition value of n?
“K-times” … what is the “K”
Can somone put these in terms for a simpleton? I am trying to grasp the Bollinger band concept. I understand the overall theory, yet I am having trouble deciphering all of the terms and values. What is the most important aspect of the bands I really need to understand to make it a usefull tool?
I’d recommend going into the pip school and finding the section on bollinger bands. Theres a good writeup and explanation on how they are used. It’s a good start.
I have yet to grasp the essence of it but there are major associations with BBands and how the price action moves inside them.
n is the # of periods the moving average uses, last 10 bars or last 100 bars n=10 or n=100 respectively.
k is the offset of the upper and lower bands from the middle band, a larger k value is a greater offset. The outer bands would be further from the middle band.
The middle bollinger band (BB) is the simple SMA sampled over n period. period being the width of the bar or candle say 15 min, 30 min, 1 hour etc.
The upper bollinger band is positioned within the so called Confidence Level (CL) for a given price relative to the middle BB. In normal distribution the CL is measured by delta or standard deviation (standard deviation (SD) is a statistical measure of the scattering of a set of data). K is the number of SD’s that you want to use. For example, with k =1 or 1 SD we are covering 68% of data values and 2 SD gives us 95% confidence level or coverage. Now with the conventional BB settings, the upper and lower BB are 2 SD from the middle BB and that means that within 95% confidence level, the price moving up will be restricted by middle BB and upper BB. The reverse will apply to lower BB.
If you want 99% CL you can choose this K = 3 to cover wider area
Billinger on Bollinger. I will have to ad that to the collection of books I have been amassing in the past 2 weeks:
Currency Trading for Dummies
Technical Analysis for Dummy’s
Candlestick Cahrting for Dummy’s
A beginners guide to daytrading
Getting Started in Candlestick Charting
This Forex stuff is going to take a lot of time and effort to even start to be able to be consistant. I have started a training account with ONANDA. I have no clue whats going on…so many numbers and variables…
If I may add another title to your list, especially if you want to know more about candlesticks and the like, also read Japanese Candlestick Charting Techniques. I have been going through this book recently.
The authoer is Steve Nison, credited with the mass appeal of introducing Candlestick charting to western markets. It’s a great read!