Over the years numerous technical indicators
have been developed to describe performance, as well as to predict future price
movements. In this section we introduce five of the most useful indicators and
explain how they are calculated.
Bollinger Band
Sometimes prices appear to remain in a range for
extended periods of time. A good way to describe this situation is to define a
moving range around the prices. Some people use an upper boundary and a lower
boundary to define the range; the upper boundary is calculated as a moving
average of a chosen period plus 5% of the price, and the lower boundary is the
moving average minus 5%. These boundaries have the drawback of being too narrow
to accommodate price levels when volatility is high and too wide when
volatility is low. A better solution, recommended by John Bollinger, defines
the upper boundary as a chosen moving average plus twice the corresponding
standard deviation, with the lower boundary as the moving average minus twice
the standard deviation. The method is described below:
The Bollinger Band includes 3 lines: the upper
band, lower band, and the centerline. The centerline is simply the moving
average, and the upper and lower bands are, respectively, the center line
plus/minus twice the standard deviation. For a pperiod Bollinger band:
Center Line = pperiod moving average
Upper Band = Center Line + 2 x StdDev
Lower Band = Center Line  2 x StdDev
Figure 5. Bollinger Band

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