Archive for the ‘trend lines’ tag
Standard Deviation Bands
Bollinger bands are a very popular application of price distributions. They do not detrend price, but calculate the standard desiation of prices over a period of 20 days and form a band of 2 standard deviations around the trendline. It is common for traders to vary both the period and the number of standard deviations used to construct the band. Once calculated, Bollinger bands can be displayed on any price chart and used to generate buy and sell signals, much the same as any other channel breakout system. Using a smaller Bollinger band, for example, 1 standard deviation, will give many more signals than using one of 3 standard deviations. At the same time, a band of 3 standard deviations translates into risk that is 3 times greater than 1 standard deviation. Signals produced with a larger band tend to be more reliable, but have greater risk.