Bollinger Bands: Construction and a Basic Trading Rule

Summary

This article introduces Bollinger Bands as a volatility-based technical indicator built around a moving average. It describes the middle band as an N-day average of closing prices and the upper and lower bands as that average plus or minus a multiple of the closing-price standard deviation. The band width therefore changes with recent price variability; the article gives two as the usual multiplier, while leaving the lookback period unspecified.

The basic rule buys when the closing price crosses above the lower band and sells when it crosses below the upper band. This is a simple price-and-band signal, but the document offers no backtest, market examples, or performance evidence. It does not specify execution timing, position sizing, stop rules, fees, or how to handle persistent trends, so the rule should be understood as a basic illustration rather than a validated strategy.

Key ideas

• The middle Bollinger Band is a moving average of closing prices over a selected lookback window.
• The outer bands sit a chosen number of standard deviations above and below the moving average.
• The band width responds to changes in recent price variability.
• The example rule buys on an upward crossing of the lower band and sells on a downward crossing of the upper band.
• The article supplies no testing or risk-management details to establish the rule’s performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.