Bollinger Upper Band Breakout / Bollinger Lower Band Breakdown
Bollinger Bands, one of the most used technical analysis algorithms, is an indicator developed by John Bollinger in the early 1980s. It is a powerful and reliable algorithm used to determine the direction of the trend and possible trend changes. According to Bollinger, prices move within the bands at a rate of 88-89%. For this reason, he states that price movements outside the Bollinger Bands are unusual. Bollinger Bands, which are determined according to the simple moving average, consist of three bands, upper, middle and lower, plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a price.
- Upper Band = 20 period simple moving average + (20 period standard deviation x2)
- Middle Band = 20 period simple moving average
- Lower Band = 20 period simple moving average - (20 period standard deviation x2)
In general usage, the standard deviation of Bollinger Bands is 2 and the period is 20. Upper band resistance is considered as lower band support level.
Bollinger Band formula;
BOLU = MA(TP,n)+m∗σ[TP,n]
BOLD = MA(TP,n)−m∗σ[TP,n]
BOLU = Upper Bollinger Band
BOLD = Lower Bollinger Band
MA = Moving average
TP (typical price)=(High+Low+Close)÷3
n=Number of days in smoothing period (typically 20)
m=Number of standard deviations (typically 2)
σ[TP,n]=Standard Deviation over last n periods of TP
While there is an uptrend, prices can exceed the upper band and continue their movement in this direction. While there is a downtrend, prices can go below the lower band and continue their movement in this direction.