Bollinger band consists of 3 lines. The middle line is calculated as 20 day moving average of price close numbers, refer to column 2 in the below table. The upper and lower bands are set at 2 standard deviations from the middle line, refer to columns 4 and 5. The last column is calculated as the difference between upper and lower band and indicates volatility. If volatility is high, the band in the last column will widen and will narrow down when volatility is low.
The upper and lower band acts as resistance and support lines. This allows the trader to anticipate the price action of the stock. Generally Bollinger bands contain 80-90% of the price action, which makes a move outside the bands significant. Prices above the upper Bollinger bands are considered relatively high. The filter value is calculated by dividing the close price by upper Bollinger band and subtracting one – indicating how far the close price is from upper Bollinger band in percentage terms. Thus, a high positive value of the filter might indicate relatively higher price. Bollinger bands should always be used in tandem with other technical indicators, as in a strong uptrend prices can remain close to or above the upper Bollinger band for a long period of time.