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

“Twin-Line Chart” by LeDoux – 1960 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

Trading Bands Envelopes Channels Types of Envelopes Lines above and below a central tendency Envelopes Lines above and below by a % Channels Parallel lines above and below prices

Envelope Examples – “Envelope” - 2 Moving Averages, one shifted up, the other down - Sell when reach upper envelope, buy when reach lower

Envelope Examples – “Price Channel” - Upper line is Highest High for n bars, Lowest Low for n bars - Indicate Support and Resistance lines

Envelope Examples – “Projection Bands” - Project Price over n bars forward ( completely contains prices ) - Sell when reach upper band, buy when reach lower

Envelope Examples – “Projections Bands”

Envelope Examples – “Standard Error Bands” - Bands are Standard Error above and below linear regression - Measures volatility, use with “r-squared” indicator

Bollinger Bands John Bollinger – Financial News Network, “Market Technician” in 1980’s 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”

Using Bollinger Bands “The Squeeze” “Walk the Bands” Sideways trend Low volatility followed by break-out, higher volatility Lower volatility marks end of trend, Opposite Band turns in at end of trend “Walk the Bands” Indicates strong trend pullbacks to Moving Average Sideways trend tag of upper, followed by tag of lower band, and visa versa If cross Mov Ave, then will continue to Band

Using Bollinger Bands – The Squeeze, Walking the Bands

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 Volume & Price: Demand Index Money Flow PriceVolume Trend Accum Distribution Intraday Intensity Chaiken AD Oscillator Volume Weighted MACD ?

Bollinger Bands – with Money Flow Index (MFI) Declining MFI confirms downtrend MFI

Using Bollinger Bands – “Bandwidth, %b” Measures distance between upper and lower band Greater distance -> greater volatility, strong trend Use Bandwith to find “The Squeeze” Lesser distance -> lesser volatility, sideways Bandwidth formula BBandTop(CLOSE, 20, S, 2) – BBandBot(CLOSE, 20, S, 2) %b 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 %b formula (CLOSE – BBandBot(CLOSE, 20, S, 2)) / Fml(“BandWidth”)

Using Bollinger Bands – Bandwidth, %b

Bollinger Bands – Applied to indicators Apply Bollinger Bands to MFI, RSI, etc Shows Range of Indicator (Standard Deviation) %b of Indicator Shows Relative Highs and Lows of indicator instead of Fixed Highs and Lows (80/20 Overbought/Oversold)

Bollinger Bands Applied to Indicators

Bollinger Bands - %b Applied to Indicators

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