Bollinger bands explained pdf

Bollinger Bands ® Explained - The Best Trading Indicator - Tradeciety Trading Academy

 

bollinger bands explained pdf

What are Bollinger Bands? Bollinger Bands are a technical trading tool created by John Bollinger in the early s. They are a volatility indicator and use the mathematical concept of standard deviations to measure price volatility around a moving average to generate trading signals. During periods of increased fluctuation, the bands will widen to take this into account. Bollinger Bands ® explained As the name implies, Bollinger Bands ® are price channels (bands) that are plotted above and below price. The outer Bollinger Bands ® are based on price volatility, which means that they expand when the price fluctuates and trends strongly, and the Bands contract during sideways consolidations and low momentum trends. One of the major dangers with Bollinger Bands is that you soon accept them to be some sort of a Holy Grail of contrarian trading. Just because a stock outside of its Bollinger Band does not mean that it is ready to revert to the mean.


A complete explanation of Bollinger Bands


Trading bands and envelopes serve the same purpose, they provide relative definitions of high and low that can be used to create rigorous trading approaches, in pattern recognition, and for much more. Bands are usually thought of as employing a measure of central tendency as a base such as a moving average, whereas envelopes encompass the price structure without a clearly defined central focus, perhaps by reference to highs and lows, or via cyclic analysis.

We'll use the term trading bands to refer to any set of curves that market technicians use to define high or low on a relative basis. The earliest example of trading bands that I have been able to uncover comes from Wilfrid Ledoux in He used curves connecting the monthly highs and lows of the Dow Jones Industrial Average as a long-term market-timing tool. After Bollinger bands explained pdf the exact sequence of trading band development gets foggy. In Chester Keltner proposed a trading system, bollinger bands explained pdf, The Day Moving Average Rule, which later became Keltner bands in the hands of market technicians whose names we do not know.

Next comes the work of J. Hurst who used cycles to draw envelopes around the price structure. Hurst's work was so elegant that it became a sort of grail with many trying to replicate it, but few succeeding. In the early '70s percentage bands became very popular, though we have no idea who created them. They were simply a moving average shifted up and down by a user-specified percent. Percentage bands had the decided advantage of being easy to deploy by hand.

Arthur Merrill suggested bollinger bands explained pdf and dividing by one plus the desired percentage. When I started using trading bands percentage bands were the most popular bands by far. Along the way we got another fine example of envelopes, Donchian bands, bollinger bands explained pdf, which consist of the highest high and lowest low of the immediately prior n-days.

Over the years there have been many variations on those ideas, some of which are still in use. Today the most popular approaches to trading bands are Donchian, Keltner, Percentage and, of course, Bollinger Bands. Percentage bands are fixed, they do not adapt to changing market conditions; Donchian bands use recent highs and lows and Keltner bands use Average True Range as adaptive mechanisms.

Bollinger Bands use standard deviation to adapt to changing market conditions and thereby bollinger bands explained pdf a tale.

When I became active in the markets on a full time basis in I was mainly interested in options and technical analysis. Information on both was hard to obtain in those days but I persisted; with the help of an early microcomputer I was able to make some progress. A touch of the upper band by price that was not confirmed by strength in the oscillator was a sell setup and a similarly unconfirmed tag of the lower band was a buy setup.

The problem with that approach was that percentage bands needed to be adjusted over time to keep them germane to the price structure and the adjustment process let emotions into the analytical process, bollinger bands explained pdf. If you were bullish, you had a natural tendency to draw the bands so they presented a bullish picture, if you were bearish the natural result was a picture with a bearish bias. This was clearly a problem.

We tried reset rules like lookbacks with some success, but what we really needed was an adaptive mechanism. I was trading options at the time and had built some volatility models in an early spreadsheet program called SuperCalc.

One day I copied a volatility formula down a column of data and noticed that volatility was changing over time. Seeing that, I wondered if volatility couldn't be used to set the width of trading bands.

That idea may seem obvious now, but at the time it was a leap of faith. At that time volatility was thought to be a static quantity, bollinger bands explained pdf, a property of a security, and that if it changed at all, it did so only in a very long-term sense, over the life of a bollinger bands explained pdf for example.

Today we know the volatility is a dynamic quantity, indeed very dynamic. After some experimentation I settled on the formulation we know today, an n period moving average with bands drawn above and below at intervals determined by a multiple of standard deviation We use the population calculation for standard deviation.

The defaults today are the same as they were 35 years ago, 20 periods for the moving average with the bands set at plus and minus two standard deviations of the same data used for the average, bollinger bands explained pdf.

I had presented a chart showing an unconfirmed tag of my upper band and explained that the first down day would generate a sell signal. They are curves drawn in and around the price structure usually consisting of a moving average the middle bandan upper band, and a lower band that answer the question as to whether prices are high or low on a relative basis.

Bollinger Bands work best when the middle band is bollinger bands explained pdf to reflect the intermediate-term trend, bollinger bands explained pdf, so that trend information is combined with relative price level data, bollinger bands explained pdf. The first down day was the sell signal and entry, bollinger bands explained pdf.

We have come a long way since the bands were developed. Today we have a suite of Bollinger Bands tools with at least one tool in every major technical analysis indicator category. And with more on the way; wherever you are, whatever you trade, Bollinger Bands and the related tools will be there for you.

 

 

bollinger bands explained pdf

 

Bollinger Bands ® explained As the name implies, Bollinger Bands ® are price channels (bands) that are plotted above and below price. The outer Bollinger Bands ® are based on price volatility, which means that they expand when the price fluctuates and trends strongly, and the Bands contract during sideways consolidations and low momentum trends. BOLLINGER BANDS - The methods as explained by John Bollinger in his book, Bollinger on Bollinger Bands INTRODUCTION Trading bands, which are lines plotted in and around the price structure to form an envelope, are the action of prices near the edges of the envelope that we are interested in. Bollinger Bands are a technical analysis tool, specifically they are a type of trading band or envelope. Trading bands and envelopes serve the same purpose, they provide relative definitions of high and low that can be used to create rigorous trading approaches, in pattern.