Bollinger bands technische analyse pdf
However, from my experience, the guys that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day. A simple moving average is used because the standard deviation formula also uses a simple moving average. Notice how GOOG gapped up over the upper band on the open, had a small retracement back inside of the bands, then later exceeded the high of the first candlestick. Strategy 5 - Snap back to mthe iddle band, will work in very strong markets.
Bollinger on Bollinger Bands: For the 30th anniversary of Bollinger Bands, John Bollinger held a special two-day seminar teaching how to use his Bollinger Bands and which indicators to use for confirmation. The theme for the seminar was Bollinger Bands: The Market Timing Report is a collection of charts John Bollinger uses to forecast stock market movements.
It is updated weekly and is available to all BollingerBands. Commentary for the charts is provided with a Bollinger Bands Letter subscription. Guidelines for the Market Timing Report can be read here. In Chester Keltner proposed a trading system, The Day Moving Average Rule, which later became Keltner bands in the hands of market technicians whose names we do not know.
Next comes the work of J. Hurst who used cycles to draw envelopes around the price structure. Hurst's work was so elegant that it became a sort of grail with many trying to replicate it, but few succeeding.
In the early '70s percentage bands became very popular, though we have no idea who created them. They were simply a moving average shifted up and down by a user-specified percent. Percentage bands had the decided advantage of being easy to deploy by hand. Arthur Merrill suggested multiply and dividing by one plus the desired percentage.
When I started using trading bands percentage bands were the most popular bands by far. Along the way we got another fine example of envelopes, Donchian bands, which consist of the highest high and lowest low of the immediately prior n-days. Over the years there have been many variations on those ideas, some of which are still in use. Today the most popular approaches to trading bands are Donchian, Keltner, Percentage and, of course, Bollinger Bands. Percentage bands are fixed, they do not adapt to changing market conditions; Donchian bands use recent highs and lows and Keltner bands use Average True Range as adaptive mechanisms.
Bollinger Bands use standard deviation to adapt to changing market conditions and thereby hangs a tale. When I became active in the markets on a full time basis in I was mainly interested in options and technical analysis. Information on both was hard to obtain in those days but I persisted; with the help of an early microcomputer I was able to make some progress. A touch of the upper band by price that was not confirmed by strength in the oscillator was a sell setup and a similarly unconfirmed tag of the lower band was a buy setup.
The problem with that approach was that percentage bands needed to be adjusted over time to keep them germane to the price structure and the adjustment process let emotions into the analytical process. Click here to download this spreadsheet example. Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because the standard deviation formula also uses a simple moving average.
The look-back period for the standard deviation is the same as for the simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band. Settings can be adjusted to suit the characteristics of particular securities or trading styles. Bollinger recommends making small incremental adjustments to the standard deviation multiplier. Changing the number of periods for the moving average also affects the number of periods used to calculate the standard deviation.
Therefore, only small adjustments are required for the standard deviation multiplier. An increase in the moving average period would automatically increase the number of periods used to calculate the standard deviation and would also warrant an increase in the standard deviation multiplier.
Bollinger suggests increasing the standard deviation multiplier to 2. W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band.
Second, there is a bounce towards the middle band. Third, there is a new price low in the security. This low holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break. First, the stock formed a reaction low in January black arrow and broke below the lower band. Second, there was a bounce back above the middle band.
Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, Bollinger Bands are calculated using closing prices so signals should also be based on closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high.
M-Tops were also part of Arthur Merrill's work that identified 16 patterns with a basic M shape. According to Bollinger, tops are usually more complicated and drawn out than bottoms. Double tops, head-and-shoulders patterns, and diamonds represent evolving tops. In its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal.
The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. This is basically the opposite of the W-Bottom.
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