. . .more on Formulas 

. . . more on Charts 

Above is a Daily Candlestick Chart of Microsoft Corporation (MSFT).  The blue bands in the upper chart pane represent the Bollinger Bands created using the preferences specified below.  The gray center line represents the average typical price off which the Bollinger Bands are based.  In the middle pane, a custom indicator is charted in green, representing the Bollinger %b line.  In the lower pane, another custom indicator is charted in orange, representing the Bollinger Bandwidth.  Both of these custom indicators will be discussed further below.

. . . more on Preferences 

• Moving Avg Type - MA Type used for the smoothing of the typical price.  The smoothed typical price will be used as the center line for the Bollinger Bands.

• Moving Avg Period- Period used for the smoothing of the typical price.  This period is also used to compute the standard deviation.

• Standard Deviations - Number of standard deviations above and below the center line for which to draw the upper and lower Bollinger Bands.

• Bands Color - Color of the Bollinger Band lines.

• MA Line Color - Color of the Center line (if drawn).

• Draw Bands Only (no center line) - If this checkbox is checked, then the center line will not be drawn.  Only the Bollinger Bands will be drawn.

Bollinger bands are calculated by first smoothing the typical price using the MA type and period specified.  The typical price for each bar is defined as (high + low + close)/3.  The standard deviation is then calculated for the series of typical prices.  The same period used for smoothing the data is also used for calculating the standard deviation of typical price.  Trading bands are then drawn at some user-specified multiple of standard deviations above and below the center smoothed typical price line. Market reversals often occur near the upper and lower bands.

Bollinger recommends using a Simple 20 period moving average, on a typical price of HLC/3, and with bands at 2 standard deviations.

Two other indicators have been derived from Bollinger Bands.  Both are discussed on p. 58 of the May 2002 issue of Stocks and Commodities Magazine in an interview with John Bollinger.

The first on is called "%b", and tells us where price currently is in relation to the bands.  This %b indicator can be created within Investor/RT using a Custom Indicator with the following syntax:

(CL - BOLD) / (BOLU - BOLD)

BOLU represents the upper band.  BOLD represents the lower band.  CL represents the current (closing) price.  The Bollinger %b should be interpreted as follows:

• A value of 1.0 would mean that price is currently at the upper band.
• A value above 1 would mean that price is currently above the upper band.
• A value of 0 would mean price is currently at the lower band.
• A negative value would mean that price is currently below the lower band.

The %b custom indicator can be seen charted in the illustration above.

The second  indicator is the Bollinger Bandwidth.  It is the upper band minus the lower band divided by the middle band.  The bandwidth can be created within Investor/RT using a Custom Indicator with the following syntax:

(BOLU - BOLD) / MA

BOLU represents the upper band.  BOLD represents the lower band.  MA represents the smoothed typical price using the same MA type and period as the Bollinger Bands.  This MA will give you the same value as is used for the center line.

High values of bandwidth represent regions of high volatility, while low values of bandwidth represent regions of low volatility.  The bandwidth custom indicator can be seen charted in the illustration above.
 

HI > BOLU

And similarly,  to look for oversold situations when price falls below the lower band:

LO < BOLD

Other strategies involving Bollinger Bands can be found in the description above.