Bollinger Bands Explained

Bollinger Bands are a technical analysis tool invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades.

Bollinger Bands owe their name to some quick thinking by the man who created them. As an investment analyst on a U.S. business TV channel in the early 1990s, John Bollinger was explaining his method of gauging market volatility through stock trading bands, which help investors measure price movement.

Used in technical analysis. Bollinger bands are lines plotted one standard deviation above and below the moving average of the closing prices. A standard deviation measures price volatility so these bands narrow and widen in line with volatility ? The narrowing of the bands often indicates the start of a new trend, which is confirmed when prices break and close out of the band. Bollinger bands may be used with any price chart but are most commonly used with bar charts.

Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time.

There is an horizontal range between 1,0110 and 1,0150. Support and resistance are given by Bollinger bands. USD CAD moves without trend and swings around exponential moving averages (EMA 50 and 100). The volatility is low. Bollinger bands are flat. The price should continue to move in 1,0070 / 1,0200 range.

On the graph you can see the overall trend of the market and a quick reference for supply and demand as well as support and resistance area's by using a 20 day moving average and 2 standard deviations in calculating the Bollinger Bands. The Nasdaq Composite Index moves toward the upper band in mid January. A break from the upper band is an indication of slowing momentum and can provide evidence of the relative enthusiasms of buyers and sellers. Nasdaq then breaks through the center moving average giving a bearish signal through a lack of support evidence at the 20 day moving average. A retreat to the lower boundary of the Bollinger band continues for some time with no break of the 20 day MA from below for the period of the graph. This builds supporting evidence of price trend.

Like STARC bands, Bollinger Bands are used in many different ways as some traders apply them to identify price extremes. Others use them as a sort of trading system as if prices move above the 20-day moving average then the upper Bollinger band should be reached. Conversely, if the moving average was violated, then the target would be the lower band. Closes outside of the bands are viewed as continuation signals that are similar to those generated by volatility breakout systems.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Technical analysts will look for trends and then predict price movements. Trends can be found in various types of charts including: candlestick, bar, moving averages and support and resistance among others. Because technical analysis involves locating trends and finding the buying/selling signals, many technical analysts will make a trading decision on a stock without knowing what that company does.

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.

They include a variety of powerful tools - on-balance volume, volume-price trend, negative and positive volume indexes, intraday intensity, accumulation/distribution, the money flow index, and volume-weighted moving average convergence/divergence (MACD). These tools have been developed over the years by some widely known (and some not-so-widely known) technical analysts like Joe Granville, David Bostian, and Larry Williams. Much of John Bollinger's recent work has been in the area of volume, and his efforts to find and improve upon volume indicators as a complement to his work on price action through Bollinger Bands are in full evidence here. As in the first half of the seminar, "Advanced Topics" is replete with both examples and formulas (including MetaStock code and TradeStation's EasyLanguage code).

Bollinger Bands are displayed as three bands. The middle band is a normal moving average. In the following formula, "n" is the number of time periods in the moving average (e.g., 20 days).

EUR AUD is in a range between 1,5950 and 1,6130. EUR AUD moves without trend and swings around exponential moving averages (EMA 50 and 100). The volatility is low. Bollinger bands are flat. ForexTrend 4H (Mataf Trend Indicator) is in a bearish configuration. The price should continue to move in Bollinger bands.

The Bollinger Bands were created by John Bollinger in the late 1980s. Bollinger studied moving averages and experimented with a new envelope (channel) indicator. This study was one of the first to measure volatility as a dynamic movement. This tool provides a relative definition of price highs/lows in terms of upper and lower bands.

Developed by John Bollinger, Bollinger Bands are similar to moving average envelopes. The bands are plotted at two standard deviations above and below a 20-day moving average. As a rule, prices are considered overbought when they touch the upper band. They are considered oversold when they touch the lower band. Using two standard deviations ensures that 95% of the price data will fall between the two trading bands.

The use of Bollinger Bands varies wildly among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band.

Longer-term SD-band analysis uses 50-day SD bands of raw price data graphed above and below a price�s 50dma. Technical analysts generally use +/-2.5 SD bands for longer-term trading, for positions expected to be held for months to over a year. Statistically, market prices ought to be within two and a half standard deviations about 99% of the time on average.

The last concept in the seminar is Bollinger Boxes. Bollinger Boxes represent an effort to provide a meaningful price filter that does not, in actuality, do the exact opposite of what a filter is supposed to do. Ironically, volatility - which is the mainstay of Bollinger Bands - is considered by John Bollinger to be a "terrible filter." Instead, his work on Bollinger Boxes points to more accurate filters being derived from percentages and price points themselves. Further, Bollinger showed how variable filters in most cases outperformed fixed price filters (such as Arthur Merrill's fixed 8% price filter).

Sharp price changes can occur after the bands have tightened and volatility is low. In this instance, Bollinger Bands do not give any hint as to the future direction of prices. Direction must be determined using other indicators and aspects of technical analysis. Many securities go through periods of high volatility followed by periods of low volatility. Using Bollinger Bands, these periods can be easily identified with a visual assessment. Tight bands indicate low volatility and wide bands indicate high volatility. Volatility can be important for options players because options prices will be cheaper when volatility is low.

Simple and exponential moving averages and Bollinger Bands are lagging indicators because they follow (or lag behind) the prices and only later in the move will the indicator offer a buy or sell signal. Lagging indicators have a high profit probability only in strongly trending markets.