Technical Analysis

Bollinger Bands – The Basic Rules

One of the great joys of having invented an analytical technique such as Bollinger Bands (see desc. below) is seeing what other people do with it. While there are many ways to use Bollinger Bands, following are a few rules that serve as a good beginning point.

  1. Bollinger Bands provide a relative definition of high and low.
     
  2. That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
     
  3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
     
  4. Volatility and trend have already been deployed in the construction of Bollinger Bands, so their use for confirmation of price action is not recommended.
     
  5. The indicators used should not be directly related to one another. For example, you might use one momentum indicator and one volume indicator successfully, but two momentum indicators aren’t better than one.
     
  6. Bollinger Bands can also be used to clarify pure price patterns such as "M" tops and "W" bottoms, momentum shifts, etc.
     
  7. Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.
     
  8. Closes outside the Bollinger Bands are continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.)
     
  9. The default parameters of 20 periods for the moving average and standard deviation calculations, and two standard deviations for the bandwidth are just that, defaults. The actual parameters needed for any given market/task may be different.
     
  10. The average deployed should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-term trend.
     
  11. If the average is lengthened the number of standard deviations needs to be increased simultaneously; from 2 at 20 periods, to 2.5 at 50 periods. Likewise, if the average is shortened the number of standard deviations should be reduced; from 2 at 20 periods, to 1.5 at 10 periods.
     
  12. Bollinger Bands are based upon a simple moving average. This is because a simple moving average is used in the standard deviation calculation and we wish to be logically consistent.
     
  13. Make no statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The sample size in most deployments of Bollinger Bands is simply too small for statistical significance.
     
  14. Indicators can be normalized with %b, eliminating fixed thresholds in the process.
     
  15. Finally, tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.


Editor’s Note:  Bollinger Bands are a fairly ubiquitous study in modern technical analysis.  Their creator, John Bollinger, offers his advice for their application above.  For those new to the Bands, they can be thought of as a volatility adaptive moving average envelope or channel.  Notice in the chart below how the Bands widen or narrow based on the market’s volatility (in this case monthly S&P e-mini prices).


The central line of the Bollinger Band plot is a simple moving average.  The upper Band is plotted a number of standard deviations above the average, and the lower Band is drawn the same distance below. The standard deviation is calculated on the same data as the moving average.  The default setting of many charting systems is 20 periods for the average and 2 standard deviations for the Band plot.

John Bollinger, CFA, CMT is the president and founder of Bollinger Capital Management, Inc., an investment management company that provides technically driven money management services to individuals, corporations, trusts and retirement plans. Bollinger Capital Management also develops and provides proprietary research for institutions and individuals.Mr. Bollinger was the Chief Market Analyst for many years for Financial News Network, a nationwide cable network. He continues to present market analysis and commentary on CNBC, FNN’s successor and speaks at financial conferences worldwide.John Bollinger is probably best known for his Bollinger Bands, which have been widely accepted and integrated into most of the analytical software currently in use. His book Bollinger On Bollinger Bands was published by McGraw Hill and is has been translated into six languages.His Capital Growth Letter is published monthly and updated twice weekly via a hotline. It provides investment advice for the average investor employing a technically driven asset allocation approach and is available electronically or via post.John Bollinger also is the founder of several financial websites:www.EquityTrader.comEquityTrader is a website Mr. Bollinger launched in 1998. The site provides stock charts with Bollinger Bands and various technical indicators, plus rankings of past performance and potential appreciation for 4,200 equities and indices. Investors use EquityTrader for new investment ideas, rating of stock's performance potential, second opinion on stocks being considered and excellent technical charts. A Pro section offers stocks with trading signals based on Bollinger Bands, plus screening for selecting stocks based upon a wide variety of criteria.www.FundsTrader.comFundsTrader provides past performance and potential appreciation rankings for 1,200 mutual funds. A unique feature of the site is the prediction of the closing net asset value for the mutual funds tracked prior to the close of the market using a proprietary correlation system. Provides excellent charts and mutual fund analysis.www.BollingerBands.comBollingerBands.com provides comprehensive information about Bollinger Bands.  Bollinger’s newsletters, DVD set, videos classes and book are available at this site.www.BollingerOnBollingerBands.comThe site supports John Bollinger's book “Bollinger on Bollinger Bands” and provides access to the trading systems that are introduced there. It provides daily lists of the stocks that qualify for each of the three Trading Methods presented in the book. There is also an excellent charting and screening area.www.GroupPower.comThis new site provides industry group analysis using a group structure developed by Mr. Bollinger. The premise behind Group Power is that the key to successful stock picking is selecting industry groups which are strong. Group Power provides a wide array of market statistics designed to assist the investor when making market timing and investment decisions.www.PatternPower.comThis is a site developed for institutional investors. The analysis classifies stocks into 32 patterns, 16 M patterns and 16 W patterns and analyses each security to answer three questions: Where is it trading? Where is it going? What does it take to break the pattern? Screening, alerts and analysis are also provided.After purchasing his first microcomputer in 1977, Mr. Bollinger became involved in the seminal stages of computer driven market analysis. Today he continues to write some of his own software and also makes use of a number of commercial analysis packages.Bollinger graduated from the School of Visual Arts majoring in cinematography and started studying the market shortly thereafter. He is a Chartered Financial Analyst (CFA), a Chartered Market Technician (CMT) and a former board member of the Market Technicians Association. He is also a member of the Los Angeles Society of Financial Analysts and was the founding president of Market Analysts of Southern California. He is the recipient of the Technical Securities Analysts Association of San Francisco Lifetime Award for Outstanding Achievement in Technical Analysis and the 2005 Market Technicians Association Annual Award for Outstanding Contribution to the Field of Technical Analysis.

John Bollinger, CFA, CMT is the president and founder of Bollinger Capital Management, Inc., an investment management company that provides technicall...

Grey1

Senior member
2,186 177
Bollinger band assumes financial time series are of STATIONARY type.. This is an un acceptable assumption and I strongly advise traders to igone any entry signals given by these two bands.

( STATIONARY DATA DONOT CARRY INFORMATION WITH THEM SUCH AS RANDOM MOVEMENT OF BALLS IN THE NATIONAL LOTTERY DRAW .. NON STATIONARY DATA CARRY INFORMATION SUCH AS VOICE , STOCK PRICE FLUCTUATION, AND SO ON ,,, )

iraj
 

ducati998

Experienced member
1,193 68
Classic..............

Closes outside the Bollinger Bands are continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.)
And on the included chart, every close OUTSIDE the Bollinger Bands resulted in a REVERSAL, not a CONTINUATION.

Of course you may argue that it was a reversal, followed by a continuation, until it wasn't.
But, as always, there's wide scope for interpretation.

cheers d998
 

Rhody Trader

Senior member
2,620 264
Agreed. Bollingers Bands are like most indicators in that manner. In the article, Bollinger actually advises against using them for entry signals. Doesn't mean they can't be handy, though.

By the way, I'm not a math genius or physicist, but it strikes me that the movement of balls in the lottery draw is not actually random - no more so than the movement of financial markets. :)
 

Grey1

Senior member
2,186 177
Rhody Trader said:
Agreed. Bollingers Bands are like most indicators in that manner. In the article, Bollinger actually advises against using them for entry signals. Doesn't mean they can't be handy, though.

Coin can be handy too

By the way, I'm not a math genius or physicist, but it strikes me that the movement of balls in the lottery draw is not actually random - no more so than the movement of financial markets. :)

if the market was totally effcient ( LOTTERY DRAW ,, PURE LUCK ) then no amount of analysis would be of any use .. We as traders by defintion agree financial time series have a degree of predictibility in them HENCE OUR ANALYSIS HENCE OUR JOB HENCE THIS BB
 

TheBramble

Legendary member
8,395 1,170
darktone said:
"A picture tells a story of a thousand words!" so they say.

Yep!.. :)
Like all these 'obvious' aids to trading :LOL: it's only when you come to actively trade them live you realise what it is they aren't telling you.

I really thought Bollies alone would do the job when I started out. Sell on close above upper band - buy on close below lower band. Easy Peasy!!!

JHC!!!
 

darktone

Veteren member
3,916 1,000
TheBramble said:
Like all these 'obvious' aids to trading :LOL: it's only when you come to actively trade them live you realise what it is they aren't telling you.

I really thought Bollies alone would do the job when I started out. Sell on close above upper band - buy on close below lower band. Easy Peasy!!!

JHC!!!
;)
I see the bollies as overbought and oversold areas. I only keep a watch on the weekly (i actually put them on a daily chart but extend the average so it plots a weekly bolly on a daily chart) then use 4 and 1 hour price action for reversal signs and a 10 min for entry. :).

To put it into perspective looking at a bolly chart takes around 10 mins per week of my time :LOL:

Easy Peasy!!!
i been there 2 mate with super doooper bolly break plays using big averages on 4hour TFs :cool: ...........needless to say they didnt work!!!!!!! ROFLMAO :LOL:
 

TheBramble

Legendary member
8,395 1,170
Seriously though, what is it that convinces newbie traders, who, I assume are at the very least a lot more intelligent than I thought I was when I started, that they've spotted the bleedin' obvious whereas the assembled masses of clued-up, battle-hardened and experienced professionals with a couple of acres of super-fast hardware and state-of-the-art-plus software against whom they think they are trading, have simply not been able to find it - try as they might?

I wouldn't want to dampen this enthusiasm or indeed the much needed inflows of stupid money into the 'pot'.

It is also, I believe, a tribute to the aspirations of mankind that many still feel they and they alone have been blessed by the Universe to be able to find their edge so quickly and so easily.
 

Grey1

Senior member
2,186 177
TheBramble said:
Seriously though, what is it that convinces newbie traders, who, I assume are at the very least a lot more intelligent than I thought I was when I started, that they've spotted the bleedin' obvious whereas the assembled masses of clued-up, battle-hardened and experienced professionals with a couple of acres of super-fast hardware and state-of-the-art-plus software against whom they think they are trading, have simply not been able to find it - try as they might?

I wouldn't want to dampen this enthusiasm or indeed the much needed inflows of stupid money into the 'pot'.

It is also, I believe, a tribute to the aspirations of mankind that many still feel they and they alone have been blessed by the Universe to be able to find their edge so quickly and so easily.

Grey1 been practising , teaching, and full time trading the market for over 7.5 years.. Grey 1 has lost enought $$$ on Bollinger bands as well its recommended sister RSI in his early days of trading ..

Grey 1 is currently trading for a US bank UK division using various market neutral strategies and currently has met his 3% weekly target in da bank over the last 12 month .. Grey 1 recommends not to ignore his comments on da bollinger bands cos other wise ya be losing ur cash to ourselves..


it is ur $$$ it is ur choice

PS:-- bramble is talking sence you better listen to him if you are new to this game
 

SOCRATES

Veteren member
4,966 134
Grey1 said:
Grey1 been practising , teaching, and full time trading the market for over 7.5 years.. Grey 1 has lost enought $$$ on Bollinger bands as well its recommended sister RSI in his early days of trading ..

Grey 1 is currently trading for a US bank UK division using various market neutral strategies and currently has met his 3% weekly target in da bank over the last 12 month .. Grey 1 recommends not to ignore his comments on da bollinger bands cos other wise ya be losing ur cash to ourselves..


it is ur $$$ it is ur choice

PS:-- bramble is talking sence you better listen to him if you are new to this game
But you must admit that the appeal of the decorative value of these expanding and contracting lines is very hard for shortcutters to resist.
 

StkWinGuy

Newbie
7 1
Bollinger Bands used together with candlesticks and support and resistance areas make a tremenduous combination for trading stocks. Many of the conventional uses for BB's were tested on and therefore apply to commodities and futures. Stocks work somewhat differently in my opinion.
 

trendie

Legendary member
6,215 1,000
just out of interest, over on StrategyBuilder (sp) website, Bunnygirl has a Bollinger Band strategy.

there is a pdf called "gimmeebars" or something.

general overview:
it uses a breach of the Bollinger Band, ( ie; a price that spikes through the band, and closes below, and closes below the open-price of the same bar ) as a trigger.
You place a sell order below the extreme of the bar.( when the price has jumped up to the band )
Or a buy order if the range has dipped to the band.

seems interesting. it acknowledges that you done just sell/buy on the hit of the band, in case it runs away from you.

Also, it is from Bunnygirl, who came up with the 20WMA/5WMA strat.
 

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