In the s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it.
John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals. He believes it is crucial to use indicators based on different types of data. This strategy has become one of the most useful tools for spotlighting extreme short-term price moves.
Learn to pounce on the opportunity that arises when other traders run and hide. Bollinger Bands have become an enormously popular market tool since the s but most traders fail to tap its true potential. This intraday strategy picks tops and bottoms based on a clear recovery following an extreme move. Find entry or exit signals or develop a complete system based on average true range.
Learn how traders can use "the usual suspects" standard for trend trading when it comes to choosing indicators for commodities investing. As we move into September, technology is back to being the hottest sector on Wall Street. Use Bollinger Bands in forex trading to identify entry and exit points with ranging trends or to spot increasing volatility Learn more about how to identify buy and sell trading signals when implementing a moving average crossover strategy with Historical volatility is a long-term assessment of risk.
Here's how to calculate it in Excel. Find out about a common strategy that traders use with the volume-weighted average price, including the use of VWAP with See why the statistical concept of moving averages plays a central role for traders and chartists who rely on technical analysis Learn about some of the inherent limitations and possible misapplications of moving average analysis within technical stock Bollinger Bands display a graphical band the envelope maximum and minimum of moving averages , similar to Keltner or Donchian channels and volatility expressed by the width of the envelope in one two-dimensional chart.
Two input parameters chosen independently by the user govern how a given chart summarizes the known historical price data, allowing the user to vary the response of the chart to the magnitude and frequency of price changes, similar to parametric formulas in signal processing or control systems. The chart thus expresses arbitrary choices or assumptions of the user, and is not strictly about the price data alone.
Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average , but other types of averages can be employed as needed.
Exponential moving averages are a common second choice. Bollinger registered the words "Bollinger Bands" as a U. The purpose of Bollinger Bands is to provide a relative definition of high and low prices of a market. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. In Spring , Bollinger introduced three new indicators based on Bollinger Bands.
Bandwidth tells how wide the Bollinger Bands are on a normalized basis. Writing the same symbols as before, and middleBB for the moving average, or middle Bollinger Band:. Uses for bandwidth include identification of opportunities arising from relative extremes in volatility and trend identification.
The use of Bollinger Bands varies widely 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.
When the bands lie close together, a period of low volatility is indicated. Traders are often inclined to use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline.
If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results.
In , Lento et al. The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets. Similar results were found in another study, which concluded that Bollinger Band trading strategies may be effective in the Chinese marketplace, stating: A recent study examined the application of Bollinger Band trading strategies combined with the ADX for Equity Market indices with similar results.
A paper from uses Bollinger Bands to reduce variance in a Monte Carlo simulation used to forecast the Canadian treasury bill yield curve. In , Butler et al. Their results indicated that by tuning the parameters to a particular asset for a particular market environment, the out-of-sample trading signals were improved compared to the default parameters.