Bollinger Bands—Part 1: The BasicsIntroduction
Imagine that you are placed on an island with only a trading platform (TradingView of course) and the island gods only permitted three indicators. What three indicators would you carefully select? At the top of my list would be the Bollinger Bands.
Some people seek out complex or cryptic indicators in search for a better edge. Of course, some indicators and modes of anlaysis can be very useful despite being complex. But some indicators like the Bollinger Bands, can be valuable because of their simplicity, and they can also have a wealth of analytical value that is more complicated than would appear at a glance.
In 1983, John Bollinger invented the eponymous Bollinger Bands. This valuable indicator operates centrally on the concept of standard deviation. In other words, standard deviation is a basic statistical concept behind the indicator, i.e., this concept is basic for mathematics professors and experts, but perhaps intermediate to advanced level for others.
Standard Deviation
One can easily find the common standard-deviation formula on the internet from many reputable sources. But one doesn't have to master the formula to use the concept of standard deviation—standard deviation essentially measures the variation in the data points around a mean (or average). Khan Academy offers a very useful and insightful guide to those who want to learn the core concepts of standard deviation. Supplemental Chart A contains Khan Academy's standard-deviation illustration and its well-worded explanation, although no one alive today can take credit for discovering and establishing this formula.
Supplemental Chart A (Credit to Khan Academy's website for illustration with explanation of standard deviation)
Here is a short, somewhat summary explanation of standard deviation's formula (though it doesn't apply to standard deviation of samples, a slightly different formula).
Calculate the mean of a data set (e.g., a price series).
Calculate each data point's distance, or variance, from that mean.
The distance between each data point and the mean is then squared.
Sum all the squared distances between each data point and the mean.
Divide the sum of the squared distances by the total number of data points, or values in the data set.
Take the square root of the quotient from the previous step, which is the average of all data points' squared distances from the mean.
Moving Calculations
Having identified the statistical concept at the heart of the bands' operation, it helps to remember that the moving average at the center of the bands, sometimes called the middle band of the Bollinger Bands, mean that the entire indicator should be considered a "moving indicator." In other words, even the standard-deviation bands, plotted a given number of standard deviations above or below the moving average, are moving based on the price data that evolves as time passes. Just like the moving average at the center of the bands continues to calculate the mean based on a moving lookback window of 20 periods or some other fixed number of periods, the standard deviations above and below the mean also derive from a moving lookback window.
Analysis / Interpretation
Bollinger Bands, as John Bollinger described in the journal Technical Analysis of Stocks & Commodities, "answer the question whether prices are high or low on a relative basis." He further explained that the "bands do not give absolute buy and sell signals simply by having been touched; rather, they provide a framework within which price may be related to indicators." He essentially recommended comparing price in relation to the bands and then using the action at the edges of the bands and using such signals in combination with another well-selected indicator (e.g., one might consider RSI).
As created by Bollinger, the bands are typically set at +2 and –2 standard deviations above the mean. This can be adjusted on TradingView's platform. A well known trader, Anthony Crudele, uses the Bollinger Bands set at +3 and –3 standard deviations from the mean. He also uses the bands extensively as part of his system, and he does so with some unique and interesting features that he added. This author recommends following his videos regardless of whether his strategy is ultimately followed or adopted or whether some other strategy is adopted as most suitable for a particular asset or time frame.
The bands not only measure whether price is high or low on a relative basis. But importantly, they reveal realized-volatility conditions in the market. If price volatility (or variation from the mean without regard to direction) is expanding in a trend-like move on the specific time frame being examined, whether hourly, daily, weekly, monthly or longer, then the Bollinger Bands reveal this by opening and widening, much like jaws. The jaws of the bands contract when volatility is contracting. Volatility—implied and realized—tends toward cycles and mean reversion. So the bands helpfully show traders where volatility is within its cycle. Some traders, for example, use the bands to trade squeezes, and when the bands contract for a substantial period of consolidation and narrow significantly. The squeeze helps increase the probability of a volatility expansion, a potential a widening of the bands as price moves either in the direction of the prior trend or a reversal. As with other indicators, the significance of the signal should be interpreted in the context of the time frame being analyzed.
Supplemental Chart B
In Supplemental Chart B, notice how the Bollinger Bands contracted as price consolidated in the latter part of last year on the weekly chart of SPY. The Bollinger Bands have been expanding as price has pushed higher to new highs at the degree of trend shown, i.e., the uptrend from 2022 lows to present.
Conclusion
The Bollinger Bands provide more analytical tools and features than the ones described today. If readers are interested in a more in-depth post on Bollinger Bands (perhaps a Part 2 as contemplated by the title), please indicate this in the comments! Look forward to hearing from you.
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Johnbollinger
The Bollinger Bands are Squeezing the Juice out of GrainsSoybean short swing trade:
The Bollinger Bands width has narrowed to 2.56% of price which is a level not seen in over a year. A new 6-month or greater low in bandwidth indicates that a volatility squeeze breakout is likely upon us. Similar volatility squeeze situations exist in wheat and corn but they both broke to the downside significantly last week. Wheat was -6.42% on the week, corn -4.21%, and soybeans lagged at -0.20%.
Soybean price reached the lower parabolic SAR which is a signal to short the volatility squeeze. The stop loss is positioned at the upper SAR for this trade. A stop above the 20-day SMA would be more conservative.
The overarching price pattern is a rising wedge with what appears to be a fake breakdown in late January. If we hold below the 20-day SMA it will roll over in 3 days.
Wheat shows a similar setup already occurred a couple weeks ago but it was a head fake to the upside. There is risk in wheat being at the recent low pivot for the 3rd time. It could moon from here like gold did after making a triple bottom. Note the gigantic head and shoulders.
Wheat:
Gold:
Note the lack of a Bollinger Band squeeze at the pre-moon triple bottom:
Corn also shows a similar setup, but there was no head fake, it just broke down out of the band squeeze.
Corn:
Soybean Crush spread:
It appears positioned for a big move in either direction. Seems likely to bounce back up in concert with a soybean drop. It’s in volatility squeeze territory as well.
Oil:
The mother of all commodities has an inverse head and shoulders continuation pattern suggesting more downside:
tldr; short soybeans
Bollinger BandsHello, Let's talk about a great indicator called 'Bollinger Bands.'
On this chart, You'll read what they are, how you can use them, and what the limitations are.
Bollinger Bands are a trading analysis tool developed by John Bollinger. They are used in market finance for technical analyzes and make it possible to assess the volatility and probable evolution of prices or indices. John Bollinger first started using this tool in the 1980s.
Bollinger bands consist of three curves, one curve calculating the moving average of the data over N periods, and two other curves on either side of the moving average, each located in their initial version at a distance of twice the standard deviation over the N periods over which the moving average was calculated.
Initially, N corresponded to 20 days, but we can calculate the bands over other durations. The distance of the bands can also be changed (e.g., 1.5 or 3 times the standard deviation). With a parameter of 2, if we accept the hypothesis of the normal distribution for the values, then 95% of the observed values are statistically located between the two extreme bands.
The bandwidth is a direct indication of the volatility of the asset under consideration. Theoretically, there is more than a 95% chance that the evolution of the value will be established within the framework of the bands adjusted with a distance of two standard deviations. Low volatility is followed by high volatility, and conversely, high volatility is followed by low volatility. As a result, when the spreading of the Bollinger bands is low, it is followed by a substantial spread and, therefore, by high price volatility. These then go up and down with a variable slope.
Some people purchase when the price reaches the lower Bollinger Band and exit when the price reaches MA in the middle of the higher and lower bands. Other traders open short positions when the price cuts over the upper Bollinger Band or sell when the price drops under the lower Bollinger Band. Furthermore, the method of Bollinger Bands is not limited to stock traders; options traders, most reputably referred volatility traders, often trade options when Bollinger Bands are historically far separate or purchase options when the Bollinger Bands are historically tight together, in both cases, assuming volatility to relapse to the standard past volatilization level concerning the stock. Once the bands lie close commonly, a time of low volatility is shown. Conversely, as the bands open, an improvement in price-performance/market volatility is foretold. When the bands have only a slight incline and track almost parallel for a long time, the price will frequently vacillate between the bands as though in a tunnel. Traders are usually inclined to practice Bollinger Bands with other indicators to verify price action. In particular, the advantage of oscillator-like Bollinger Bands will usually be linked with a non-oscillatory indicator-like chart model or a trendline. If these indicators approve the recommendation of the Bollinger Bands, the trader will have higher confidence that the bands are foretelling accurate price action about market buoyancy.
- If the bands squeeze during a phase of low volatility, it increases the possibility of a visible price move in either direction. This may begin a trending movement. Mind out for a false move in the reverse direction, which changes before the proper trend starts.
- When a considerable amount separates the bands, volatility increases, and any existing trend may be ending.
- Prices manage to bounce inside the bands' box, reaching one band then moving to the other. You can use these rhythms to identify possible profit targets. For instance, if a price bound off the lower band and crosses over the MA, the upper band matches the profit point.
- Value can pass or touch a bandbox for increased periods through firm trends. On alteration with a forced oscillator, you might need to do extra analysis to decide if taking additional profits is suitable for you.
- A powerful trend continuation can be assumed when the price moves outside of the bands. Nevertheless, if prices move instantly back inside the band, then the recommended strength is canceled.
Bollinger Bands can be applied to discover how well an asset is growing and when it is probably turning or losing potency. If an uptrend is big enough, it will reach the upper band constantly. An uptrend that gets the upper band shows that the stock is selling higher, and traders can utilize the chance to make a buy choice. If the value draws back within the uptrends and lingers above the middle band and moves backward to the upper band, that determines a lot of strength. Frequently, a price in the uptrend should not reach the lower band, and if it does, it is a caution sign for the opposite or that the stock is dropping strength.
Most professional traders try to benefit from the powerful uptrends before a reversal happens. Once a stock loses to touch a new height, traders manage to trade the asset at this point to avoid acquiring losses from an inverted trend. Professional traders observe the performance of an uptrend to know when it shows power or weakness, and they apply this as an implication of a potential trend refusal.
Bollinger Bands can decide how well an asset is dropping and when it is likely turning to an upside trend. In a pronounced downtrend, the price will move on with the lower band, which explains that selling action remains powerful. But if the price collapses to reach or move along the lower band, it is a sign that the downtrend may be losing force. When there are price pullbacks, and the price lingers under the middle band and then goes back to the lower band, it means a lot of downtrend pressure. In a downtrend, prices should not break over the upper band since this would suggest that the trend may be changing or decreasing.
Many traders avoid buying through downtrends, other than looking for a chance to buy when the trend reverses. The downtrend can remain for short or long durations – minutes to months or even years. Investors must recognize any indication of downtrends quickly enough to protect their investments. If the lower bands display a constant downtrend, traders must avoid opening into long trades that show unprofitable.
Trading W-Bottoms and M-Tops:
W-Bottoms and M-Tops identified 16 models with a fundamental W-Pattern and M-Pattern. Bollinger Bands apply W patterns to classify W-Bottoms when the other low is cheaper than the first low but continues over the lower band. It happens when a low response forms near to or under the lower band. The price then tends back towards the middle or higher and builds a new low price that stays the lower.
Limitations of Bollinger Bands:
Although Bollinger Bands are practical tools for professional traders, traders should analyze a few limitations before applying them. One of these conditions is that Bollinger Bands are fundamentally reactive, not predictive. The bands will respond to changes in price movements, either uptrends or downtrends, but will not foretell prices. Like most professional indicators, Bollinger Bands are a lagging indicator. Although businesspeople may use the bands to measure the trends, they cannot apply the tool alone to make price forecasts. John Bollinger suggests that traders use two or three non-correlated tools that give more literal market signals.
Another limitation is that the official settings will not operate for all traders. Traders need to discover settings that let them set guidelines for particular stocks that they are purchasing. If the chosen band settings fail to work, traders may change or use another tool entirely. The effectiveness of Bollinger Bands changes from one market to another, and traders may be required to modify the settings if they are trading equal protection over some time.
Also, if you're interested to learn more about Bollinger Bands, visit: www.bollingerbands.com
Bollinger Bands® are the Registered Trademark of John Bollinger
Citation:
www.bollingerbands.com
en.wikipedia.org
Bollinger Bands® are the Registered Trademark of John Bollinger
I used some sentences from Wikipedia and BollingerBands since they were explained in the best possible way for you guys to understand.
Good Luck
Let me know your ideas.