The second Volatility indicator we will look at is Bollinger Bands. To do justice to this indicator, we need to cover a couple of statistical terms and this will form part1; next week part 2 will study the application of the Bollinger Bands on price charts.
Developed by John Bollinger, Bollinger Bands® are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases. The bands automatically widen when volatility increases and contract when volatility decreases. (www.stockcharts.com).
- Distribution of prices versus returns;
- The standard deviation formula;
- Calculation of the standard deviation of stock prices in Excel.