We generally prefer to choose ‘exponential’ as our moving average type in the settings of Bollinger Bands Indicator because it reacts quickly to the newest data points. In fact here are the whole settings once again –
Field – Close
Period – 20
Standard Deviations – 2
Moving Average Type – Exponential
Channel Fill – Yes
So coming to the definition of Bollinger bands. Here is how it is calculated if you abide by the settings above –
Middle Band = 20-day exponential moving average (EMA)
Upper Band = 20-day EMA + (20-day standard deviation of price x 2)
Lower Band = 20-day EMA – (20-day standard deviation of price x 2)
Q. What should be the exact settings of *Moving Average* indicator which will match our Bollinger bands’ median Bollinger?
A. It’s ma(20,ema,0,n). Period = 20 ; Field = Close ; Type = Exponential ; Offset = 0 ; Underlay = No
Q. What does ma(10,O,ema,1,n) means ?
A. Period = 10 ; Field = Open ; Type = Exponential ; Offset = 1 ; Underlay = No ; Generally we assume field is closed.
Q. What does underlay means in the Bollinger settings?
A. If we tick the underlay or mark it as yes; it means the candlesticks will appear above the moving average. In this picture the white lined moving average has its underlay as no while the red lined moving average has marked its underlay settings as yes.
So according to our probability distribution and our assumption of normal distribution, a 2SD Bollinger band should enclose 95% of the data ( i.e stock prices).