1. Bollinger Bands Metastock User Group 11/5/02 Leland Brode

2. Bollinger Bands - Outline
History
Construction of Bollinger Bands
Using Bollinger Bands
“Bandwidth” and “%b”
Building New Indicators with Bollinger Bands

3. “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

4. 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

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

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

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

8. Envelope Examples – “Projections Bands”

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

10. 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

11. Envelope Examples – “Bollinger Bands”

12. 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

13. Using Bollinger Bands – The Squeeze, Walking the Bands

14. Using Bollinger Bands – Patterns
Relative “W”, “M” pattern
Becomes - relative
Buy
Band Tag

15. Using Bollinger Bands – Patterns
Relative “W”, “M” pattern
Becomes - relative
Band Tag
Sell

16. 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 ?

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

18. 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”)

19. Using Bollinger Bands – Bandwidth, %b

20. 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)

21. Bollinger Bands Applied to Indicators

22. Bollinger Bands - %b Applied to Indicators

23. 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”)

24. 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”)

25. 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”)

26. 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

27. 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