How Bollinger Bands Indicator Works
Bollinger Bands indicator calculations uses standard deviations to draw the bands, the default value used is 2.
Bollinger Bands XAGUSD Calculation
The middle Bollinger band indicator line is a simple moving average
The upper Bollinger band line is: Middle line + Standard Deviation
The lower Bollinger band line is: Middle line - Standard Deviation
Bollinger bands indicator considers the best default moving average to calculate the Bollinger bands to be 20 periods moving average and the bands are then overlaid on the silver chart price action.
Standard Deviation is a statistics concept. It originates from the notion of normal distribution. One standard deviation away from the mean either plus or minus, will enclose 67.5 % of all price action movement. Two standard deviations away from the mean either plus or minus, will enclose 95 % of all price action movement.
This is why the Bollinger Bands indicator uses the standard deviation of 2 which will enclose 95 % of all price action. Only 5 % of silver chart price action will be outside the 3 silver trading bollinger bands, this is why silver traders open or close trades when trading price hits one of the outer Bollinger Bands.
The Bollinger Bands indicator main function is to measure price action volatility. What the Bollinger bands upper and lower limits try to do is to confine price action of up to 95 percent of the possible closing prices.
Bollinger Bands indicator compares the current closing trading price with the moving average of the closing trading price. The difference between these two trading prices is the volatility of the current trading price compared to the moving average. The trading price volatility will increase or decrease the standard deviation of the bollinger bands indicator.