Bollinger Bands

Metastock User Group 11/5/02

Leland Brode elbrode@yahoo.com

Bollinger Bands - Outline

History Construction of Bollinger Bands Using Bollinger Bands Bandwidth and %b Building New Indicators with Bollinger Bands

History of Envelopes

Twin-Line Chart by LeDoux 1960

Upper band line along monthly highs Lower band line along monthly lows Buy when lower band exeeds upper band

Ten Day Moving Average Rule by Keltnur 1960

Establish concept of typical price (hi + lo + cl / 3) Buy and Sell lines based on Moving Avg of above

Types of Envelopes

Trading Bands

Lines above and below a central tendency

Envelopes

Lines above and below by a %

Parallel lines above and below prices

Channels

Envelope Examples Envelope

- 2 Moving Averages, one shifted up, the other down - Sell when reach upper envelope, buy when reach lower

WAL MART STORES (55.0000, 57.0000, 54.6800, 56.4700, +0.40000)

Envelope

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Envelope Examples Price Channel

- Upper line is Highest High for n bars, Lowest Low for n bars - Indicate Support and Resistance lines

MART STORES (55.0000, 57.0000, 54.6800, 56.4700, +0.40000), Price Channel (58.0250), Price Channel (48.5500) 65 Price Channel 64 63 62 61 60 59 58 57 56 55 54 53 52 51 50 49 48 47 46 45 44 43 10000 x1000 Novem ber 2002 February April May June July Augus t September Novem ber

Envelope Examples Projection Bands

- Project Price over n bars forward ( completely contains prices ) - Sell when reach upper band, buy when reach lower

WMT, Proj Bands , Proj Bands

Projection Bands 20 period

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Envelope Examples Projections Bands

WMT, Proj Bands , Proj Bands

Projection Bands 30 period

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Envelope Examples Standard Error Bands

- Bands are Standard Error above and below linear regression - Measures volatility, use with r-squared indicator

WAL MART STORES (55.0000, 57.0000, 54.6800, 56.4700, +0.40000)

Standard Error Bands

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Bollinger Bands

John Bollinger Financial News Network, Market Technician in 1980s Pioneered use of Standard Deviation for construction of price envelope in 1983 Bollinger Bands are:

20 bar moving average, Upper Band is 2 Standard Deviations above Mov Ave, Lower Band is 2 Standard Deviations below Mov Ave

Contains 89% of all prices Shows Volatilitiy

Envelope Examples Bollinger Bands

WAL MART STORES (53.59000, 54.79000, 52.68000, 54.55000, +1.00000)

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Using Bollinger Bands

The Squeeze

Low volatility followed by break-out, higher volatility Lower volatility marks end of trend, Opposite Band turns in at end of trend
Indicates strong trend pullbacks to Moving Average tag of upper, followed by tag of lower band, and visa versa If cross Mov Ave, then will continue to Band

Walk the Bands

Sideways trend

Using Bollinger Bands The Squeeze, Walking the Bands

IBM (78.9000, 80.5000, 78.3200, 80.4000, +1.46000)

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The Squeeze - narrow bands followed by breakout in mid-August

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Walking the band

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Using Bollinger Bands Patterns

Relative W, M pattern

Becomes - relative

Buy Band Tag

Using Bollinger Bands Patterns

Relative W, M pattern

Becomes - relative
Band Tag Sell

Using Bollinger Bands Use with other indicators

Confirm with other indicators Bollinger Bands are a price indicator Use Volume indicators

Volume only:

On Balance Volume Volume Trend Demand Index Money Flow PriceVolume Trend Accum Distribution Intraday Intensity Chaiken AD Oscillator Volume Weighted MACD ?

Volume & Price:

Bollinger Bands with Money Flow Index (MFI)

Walm art (54.4100, 54.9300, 53.3000, 53.4200, -0.98000)

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Using Bollinger Bands Bandwidth, %b

Bandwidth

Measures distance between upper and lower band Greater distance -> greater volatility, strong trend Use Bandwith to find The Squeeze Lesser distance -> lesser volatility, sideways
BBandTop(CLOSE, 20, S, 2) BBandBot(CLOSE, 20, S, 2) Measures position of price relative to Bottom and Top bands Range 0 to 1: 0 indicates bottom band tag, 1 indicates top band tag, .5 indicates in the middle (CLOSE BBandBot(CLOSE, 20, S, 2)) / Fml(BandWidth)

Bandwidth formula

%b

%b formula

Using Bollinger Bands Bandwidth, %b

IBM (78.90000, 80.50000, 78.32000, 80.40000, +1.46000) 135 130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45

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Bollinger Bands Applied to indicators

Apply Bollinger Bands to MFI, RSI, etc

Shows Range of Indicator (Standard Deviation) Shows Relative Highs and Lows of indicator instead of Fixed Highs and Lows (80/20 Overbought/Oversold)

%b of Indicator

Bollinger Bands Applied to Indicators

IBM (78.90000, 80.50000, 78.32000, 80.40000, +1.46000) 135 130 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45 80 70 60 50 40 30 20 80 70 60 50 40 30 20 B Bands on MFI B Bands on MFI 30000
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B Bands on MFI

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Bollinger Bands - %b Applied to Indicators

APPLIE MATERIAL (14.90000, 15.95000, 14.77000, 15.72000, +0.69000) D 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9

RSI

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Bollinger Band MetasStock Formulas Bollinger Band Components BandWidth1: BBandTop(CLOSE, 20, S, 2) - BBandBot(CLOSE, 20, S, 2) %b: (CLOSE - BBandBot(CLOSE, 20, S, 2)) / Fml( "BandWidth1")

Bollinger Bands applied to Indicators

Money Flow Index BandWidthMFI: BBandTop(MFI(14), 20, S, 2) BBandBot(MFI(14), 20, S, 2) %bMFI: (MFI(17) BBandBot(MFI(17), 20, S, 2)) / Fml(BandWidthMFI) Accum/Distribution BandWidthAD: BBandTop(AD(), 17, S, 2) BBandBot(AD(), 17, S, 2) %bAD: (AD() BBandBot(AD(), 17, S, 2)) / Fml(BandWidthAD)

Chaiken AccumDistr Oscillator BandWidthADO: BBandTop(CO(), 20, S, 2) BBandBot(CO(), 20, S, 2) %bADO: (ADO() BBandBot(ADO(), 20, S, 2)) / Fml(BandWidthADO)

Intraday Momentum Index BandWidthIMI: BBandTop(IMI(17), 17, S, 2) BBandBot(IMI(17), 17, S, 2) %bIMI: (IMI(17) BBandBot(IMI(17), 17, S, 2)) / Fml(BandWidthIMI)
Volume BandWidthVol: BBandTop(VOLUME, 27, S, 2) BBandBot(VOLUME, 27, S, 2) %bVol: (VOLUME BBandBot(VOLUME, 27, S, 2)) / Fml(BandWidthVol) RSI BandWidthRSI: BBandTop(RSI(CLOSE, 17), 17, S, 2) BBandBot(RSI(CLOSE, 17), S, 2) %bRSI: (RSI(CLOSE,17) BBandBot(RSI, 17) 17, S, 2)) / Fml(BandWidthRSI)

Generic BandWidth and %b

BandWidth_20: BBandTop(p, 20, S, 2) BBandBot(p, 20, S, 2) %b_20: (p BBandBot(p, 20, S, 2)) / Fml(BandWidth_20)

Bollinger Bands - Summary

Provide Envelope for most of price action Shows Volatility The Squeeze sharp moves occur after Squeeze Walking the Bands move outside band, continue trend M and W Patterns convert to Relative M, W, trend change A move that originates at one band goes to the other band A cross of Moving Avg continues to next band Confirm with other indicators (Volume indicators) Apply Bollinger Bands to other indicators

Bollinger Bands Bibliography

Bollinger on Bollinger Bands, John Bollinger Technical Analysis of the Financial Markets, John Murphy Getting Started in Technical Analysis, Jack Schwager Technical Analysis for the Trading Professional, Constance Brown Technical Analysis from A to Z, Steven Achelis