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One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it. While there are many ways to use Bollinger Bands, the following are a few rules that serve as a good beginning point.
| 1. |
Bollinger Bands provide a relative definition of high and low. |
| 2. |
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. |
If you are interested in integrating Bollinger Bands into your trading methodology, please look at the eSignal Bollinger Band Tool Kit (BBTK). The BBTK presents a carefully thought-out set of tools, techniques and systems that can be used alone or combined with other tools / techniques to create unique and powerful approaches to trading and investing. Inside the BBTK, you'll find a wide variety of indicators and trading systems:
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Bollinger Bands and variations
- Indicators derived from Bollinger Bands
- Systems employing Bollinger Bands
- Indicators normalized with Bollinger Bands
- Volume indicators
Much of the content of the Tool Kit comes directly from my book Bollinger On Bollinger Bands, and the book effectively serves as the manual for the Tool Kit.
It is the goal of the BBTK to serve as wide an audience as possible. Inside the Tool Kit, you will find systems, as well as tools for creating systems in it. Wherever possible, we have placed the variables at the core of the tools and systems at the disposal of the user, so you can adapt the tools to suit yourself.
Right click inside the chart where the study is, select "edit studies" from the menu, and you'll be able to alter the approaches to suit your own unique risk and reward characteristics.
eSignal 7.5 (or better) users will find an advanced charting template in the \ eSignal directory called Bollinger.ach. This template illustrates a few of the basic Bollinger Bands ideas and takes advantage of the indicators in your \ eSignal \ Formulas \ Bollinger directory. The Bollinger Bands Tool Kit itself can be found in the \ eSignal \ Formulas \ BBTK directory with many more chart templates.
I truly hope you enjoy the Tool Kit and find it useful in your practice. If you have any suggestions, requests for a new tool and / or techniques, please send them to bbands@BollingerBands.com.
See http://www.esignal.com for more information about the Tool Kit.
Good trading. |
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