The Bollinger Bands formula is quite easy. BB are calculated by placing this 3 bands together on chart given below:
- Middle line usually a 20 day simple moving average of the closing prices.
- Upper band –: 20-day SMA – (20-day standard deviation of price x 2) this is plotted +2 standard deviation above the middle line
- A lower band –: (20-day standard deviation of price x 2) + 20-day SMA) this is plotted -2 standard deviation below the middle line
What is standard deviation?
SD in general measures how far you’re away from the average(in this case 20 days SMA). Standard deviation (SD) is same as volatility. For example, if the standard deviation of a stock is 5%, it is equal to saying the volatility of the stock is 5%.
Standard deviation is a mathematical measurement of average variance used in statistics, economics, accounting and finance. Standard deviation calculation also uses a simple moving average formula.
Do not get worried as you will not be calculating this values by your own. On your trading software it is easily done just by few clicks. If you want to learn more about SD you can check this lesson. Also, if you are not aware about Moving Averages please read it here, it is much more important than knowing SD calculation.