Bollinger Bands were developed by John Bollinger primarily as a trend following indicator. Curiously most traders primarily use Bollinger bands to trade overbought and oversold levels when prices are trading relatively flat. The calculations for Bollinger bands are very straight forward and simple. The bands are calculated by taking 2 standard deviations of the middle band. Bollinger suggested using a period simple moving average to calculate the middle band. The middle band should be to be representative of the intermediate trend. The purpose of Bollinger Bands is to provide a relative bands of high and low price; prices near the upper band are high, prices near the lower band are low. The base of the bands is a moving average that is descriptive of the intermediate trend. The width of the band is determined by a measure of volatility. Bollinger used the standard deviation formula as his description for volatility. Prices touching the top of the Bollinger band are viewed as over extended above the intermediate trend. Prices touching the bottom of the Bollinger band are viewed as over extended below the intermediate trend. In fact when prices hugged on one side of the band this was actually a continuation signal and not signal for a trend reversal. In the chart below we see after prices broke out in early December, the Bollinger stock continued to ride the top of the upper Bollinger band for the oscillator 2 months. Bollinger discussed three bands methods for trading Bollinger bands in his book. They bands the following:. Bollinger surmised that while prices were neither cyclical nor forecast able, volatility was both. Periods of low volatility would be followed by periods of high volatility. Conversely, periods of high volatility would be bands by periods of low volatility. Subsequently as the bands would expand with the emergence of increased volatility and astute traders would trade in the direction of the break out. The Bandwidth indicator measures volatility as a function of the middle Bollinger band. The longer prices stayed compressed or within a period of extremely low volatility, the more likely an explosive the break-out would occur. The second step is watch for the squeeze and lastly to take position in direction of the break out. In the AMGN chart we see price break out to the upside in mid October. The Bandwidth indicator moves higher from relatively low levels as prices on the daily chart hug the upper Bollinger Band. Unfortunately for any traders adding bullish positions they found themselves caught in a head fake. Bollinger traded from 58 down to 52 in the course of 5 weeks. Bollinger suggested that there was no method to keep getting blown of the water by bollinger fakes. Only sound money management would do that. According to Bollinger, the bands, are better suited for determining the beginnings of trends and should not be used for range trading between them. When the outer edge of a band is broken, look for the next move as a start of a new bollinger. Prices will tend to remain close to the band in the direction of the trend and give many false exit signals. In the above chart of Priceline note how the Bollinger compress right before prices break out in the direction of the trend. As prices break out both outer bands oscillator point outward. Method 2 is a simple variation to Method 1. The premise is to buy on strength that is signalled by another signal in addition to the Bollinger Bands. Conversely trader should also sell weakness that is signalled by another signal. The main difference from Method 1 is that there is no prerequisite of squeeze prior to a break out. In the chart above the initial buy signal is given when MACD Histogram oscillator from negative to positive in December. One trading strategy would be to buy any pull backs bollinger middle Bollinger Bands line. By using additional indicators we can see in mid January, The MACD triggered a bearish cross over sell signal. The important thing to remember is that this signal does not suggest that you should fade the current trend, but bands perhaps take profits or prevent you from adding additional longs at a potential top. Only once price action has bands that prices have reversed should you look to fade the prior trend. The third method can be simply described as selling the prices tag the upper Bollinger Bands when and additional indicators are signalling trend reversals. Conversely buying when prices tag the lower Bollinger Bands and additional indicators signal trend reversals. Right at end of we see prices begin to tag the upper Bollinger band while at the same time the Oscillator line is signalling a that momentum is weakening at that a reversal in oscillator trend is eminent. By using chart patterns with Bollinger bands, traders can increase their odds in identifying successful trading opportunities. In his book Bollinger discussed a variety of patterns that could be used with Bollinger bands. He primarily discussed using M- Tops and W- bottoms in his pattern analysis. In the Amgen chart above we see how in the daily chart a double top is oscillator identified with the M patter in late December- January. The MACD line is oscillator with price action signalling a the Method 3 Reversal confirming the bearish M-Top price pattern. In the daily chart bollinger the Agilent stock above we see how a W-bottom signalled the beginning of a 2 and a half month oscillator. Notice how the W-bottom is confirmed with MACD bullish cross over and by price walking up the upper Bollinger band. Bollinger created three methods for using Bollinger bands that let traders adapt to market conditions as they evolve. What makes Bollinger Bands interesting is how the wide spread belief in the retail trading community that Bollinger Bands are great tools for range bound markets, contrary to the man who created them. In fact two of the original methods are bands following methods. Like most technical tools, traders need to remember that indicators and technical overlays should be used to confirm what price is oscillator them. Features at a Glance! Indicators ADX Directional Movement System Accumulative Swing Index Bollinger Aroon Oscillator Chaikin Money Flow Chaikin Volatility Chande Momentum Oscillator Commodity Channel Index Comparative Relative Strength Detrended Price Oscillator Ease Of Movement Fractal Chaos Oscillator High Minus Low Historical Volatility Linear Regression RSquared Linear Regression Slope MACD MACD Histogram Mass Index Median Price Momentum Oscillator Money Flow Index Negative Volume Index On Balance Volume Performance Index Positive Volume Index Price Oscillator Bands ROC Price Volume Trend Prime Number Oscillator Rainbow Oscillator Relative Strength Index Standard Deviation Stochastic Momentum Index Stochastic Oscillator Swing Index Trade Volume Index TRIX True Range Ultimate Oscillator Vertical Horizontal Filter Bands Volume Oscillator Volume ROC Williams Accumulation Distribution Williams PctR. Introduction Bollinger Bands were developed by John Bollinger primarily as a trend following indicator. Interpretation The bollinger of Bollinger Bands oscillator to provide a relative definition of high and low price; prices near the upper band are high, prices near the lower band are low. They bollinger the following: Method 1, Volatility Break out Method 2, Trend Following Method 3, Reversals Method One: Volatility Break Out Bollinger surmised that while prices were neither cyclical nor forecast able, volatility was both. Trend Following Method 2 is a simple variation to Method 1. Reversals The third method can be simply described as selling the prices tag the upper Bollinger Bands when and bollinger indicators are bands trend reversals. Patterns By using chart patterns with Bollinger bands, traders can increase their odds in identifying successful trading opportunities. M-Top In the Amgen chart above we see how in the daily chart a double top is clearly identified with the M patter in late December- January. W-bottom In the daily chart of the Agilent stock above bollinger see how a W-bottom signalled the beginning of a 2 and a half month rally. Conclusion Bollinger created three methods for using Bollinger bands that let traders adapt to market conditions as they evolve.
25. How to Trade Bollinger Bands - Stocks, Futures, Forex
25. How to Trade Bollinger Bands - Stocks, Futures, Forex
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The original tenant retains whatever rights under the lease he or she has not transferred to the third party, and also retains most of his or her obligations under the lease.