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BollingerBandsWikipedia,thefreeencyclopedia

BollingerBands
FromWikipedia,thefreeencyclopedia

BollingerBandsisatechnicalanalysistool
inventedbyJohnBollingerinthe1980sas
wellasatermtrademarkedbyhimin
2011.[1]Havingevolvedfromtheconceptof
tradingbands,BollingerBandsandthe
relatedindicators%bandbandwidthcanbe
usedtomeasurethe"highness"or"lowness"
ofthepricerelativetoprevioustrades.
BollingerBandsareavolatilityindicator
similartotheKeltnerchannel.
BollingerBandsconsistof:
anNperiodmovingaverage(MA)
anupperbandatKtimesanNperiod
standarddeviationabovethemoving
average(MA+K)

S&P500with20day,twostandarddeviationBollinger
Bands,%bandbandwidth.

alowerbandatKtimesanNperiod
standarddeviationbelowthemovingaverage(MAK)
TypicalvaluesforNandKare20and2,respectively.Thedefaultchoicefortheaverageisasimple
movingaverage,butothertypesofaveragescanbeemployedasneeded.Exponentialmovingaverages
isacommonsecondchoice.[note1]Usuallythesameperiodisusedforboththemiddlebandandthe
calculationofstandarddeviation.[note2]

Contents
1Purpose
2IndicatorsderivedfromBollingerBands
3Interpretation
4Effectiveness
5Statisticalproperties
6Bollingerbandsoutsideoffinance
7Notes
8References
9Furtherreading
10Externallinks

Purpose
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ThepurposeofBollingerBandsistoprovidearelativedefinitionofhighandlow.Bydefinition,prices
arehighattheupperbandandlowatthelowerband.Thisdefinitioncanaidinrigorouspattern
recognitionandisusefulincomparingpriceactiontotheactionofindicatorstoarriveatsystematic
tradingdecisions.[3]

IndicatorsderivedfromBollingerBands
InSpring,2010,JohnBollingerintroducedthreenewindicatorsbasedonBollingerBands.Theyare
BBImpulse,whichmeasurespricechangeasafunctionofthebandspercentbandwidth(%b),which
normalizesthewidthofthebandsovertimeandbandwidthdelta,whichquantifiesthechangingwidth
ofthebands.
%b(pronounced"percentb")isderivedfromtheformulaforStochasticsandshowswherepriceisin
relationtothebands.%bequals1attheupperbandand0atthelowerband.WritingupperBBforthe
upperBollingerBand,lowerBBforthelowerBollingerBand,andlastforthelast(price)value:
%b=(lastlowerBB)/(upperBBlowerBB)
BandwidthtellshowwidetheBollingerBandsareonanormalizedbasis.Writingthesamesymbolsas
before,andmiddleBBforthemovingaverage,ormiddleBollingerBand:
Bandwidth=(upperBBlowerBB)/middleBB
Usingthedefaultparametersofa20periodlookbackandplus/minustwostandarddeviations,
bandwidthisequaltofourtimesthe20periodcoefficientofvariation.
Usesfor%bincludesystembuildingandpatternrecognition.Usesforbandwidthincludeidentification
ofopportunitiesarisingfromrelativeextremesinvolatilityandtrendidentification.

Interpretation
TheuseofBollingerBandsvarieswidelyamongtraders.Sometradersbuywhenpricetouchesthelower
BollingerBandandexitwhenpricetouchesthemovingaverageinthecenterofthebands.Othertraders
buywhenpricebreaksabovetheupperBollingerBandorsellwhenpricefallsbelowthelower
BollingerBand.[4]Moreover,theuseofBollingerBandsisnotconfinedtostocktradersoptionstraders,
mostnotablyimpliedvolatilitytraders,oftenselloptionswhenBollingerBandsarehistoricallyfarapart
orbuyoptionswhentheBollingerBandsarehistoricallyclosetogether,inbothinstances,expecting
volatilitytoreverttowardstheaveragehistoricalvolatilitylevelforthestock.
Whenthebandslieclosetogether,aperiodoflowvolatilityisindicated.[5]Conversely,asthebands
expand,anincreaseinpriceaction/marketvolatilityisindicated.[5]Whenthebandshaveonlyaslight
slopeandtrackapproximatelyparallelforanextendedtime,thepricewillgenerallybefoundtooscillate
betweenthebandsasthoughinachannel.
TradersareofteninclinedtouseBollingerBandswithotherindicatorstoconfirmpriceaction.In
particular,theuseofoscillatorlikeBollingerBandswilloftenbecoupledwithanonoscillator
indicatorlikechartpatternsoratrendline.Iftheseindicatorsconfirmtherecommendationofthe
BollingerBands,thetraderwillhavegreaterconvictionthatthebandsarepredictingcorrectpriceaction
inrelationtomarketvolatility.
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Effectiveness
VariousstudiesoftheeffectivenessoftheBollingerBandstrategyhavebeenperformedwithmixed
results.In2007Lentoetal.publishedananalysisusingavarietyofformats(differentmovingaverage
timescales,andstandarddeviationranges)andmarkets(e.g.,DowJonesandForex).[6]Analysisofthe
trades,spanningadecadefrom1995onwards,foundnoevidenceofconsistentperformanceoverthe
standard"buyandhold"approach.Theauthorsdid,however,findthatasimplereversalofthestrategy
("contrarianBollingerBand")producedpositivereturnsinavarietyofmarkets.
Similarresultswerefoundinanotherstudy,whichconcludedthatBollingerBandtradingstrategiesmay
beeffectiveintheChinesemarketplace,stating:"Finally,wefindsignificantpositivereturnsonbuy
tradesgeneratedbythecontrarianversionofthemovingaveragecrossoverrule,thechannelbreakout
rule,andtheBollingerBandtradingrule,afteraccountingfortransactioncostsof0.50percent."[7](By
"thecontrarianversion",theymeanbuyingwhentheconventionalrulemandatesselling,andviceversa.)
ArecentstudyexaminedtheapplicationofBollingerBandtradingstrategiescombinedwiththeADX
forEquityMarketindiceswithsimilarresults.[8]
Apaperfrom2008usesBollingerBandsinforecastingtheyieldcurve.[9]
CompanieslikeForbessuggestthattheuseofBollingerBandsisasimpleandoftenaneffectivestrategy
butstoplossordersshouldbeusedtomitigatelossesfrommarketpressure.[10]

Statisticalproperties
Securitypricereturnshavenoknownstatisticaldistribution,normalorotherwisetheyareknownto
havefattails,comparedtoanormaldistribution.[11]Thesamplesizetypicallyused,20,istoosmallfor
conclusionsderivedfromstatisticaltechniqueslikethecentrallimittheoremtobereliable.Such
techniquesusuallyrequirethesampletobeindependentandidenticallydistributed,whichisnotthecase
foratimeserieslikesecurityprices.Justtheoppositeistrueitiswellrecognizedbypractitionersthat
suchpriceseriesareverycommonlyseriallycorrelatedthatis,eachpricewillbecloselyrelatedtoits
ancestor"mostofthetime".Adjustingforserialcorrelationisthepurposeofmovingstandard
deviations,whichusedeviationsfromthemovingaverage,butthepossibilityremainsofhighorder
priceautocorrelationnotaccountedforbysimpledifferencingfromthemovingaverage.
Forsuchreasons,itisincorrecttoassumethatthelongtermpercentageofthedatathatwillbeobserved
inthefutureoutsidetheBollingerBandsrangewillalwaysbeconstrainedtoacertainamount.Insteadof
findingabout95%ofthedatainsidethebands,aswouldbetheexpectationwiththedefaultparameters
ifthedatawerenormallydistributed,studieshavefoundthatonlyabout88%ofsecurityprices
(85%90%)remainwithinthebands.[12]Foranindividualsecurity,onecanalwaysfindfactorsfor
whichcertainpercentagesofdataarecontainedbythefactordefinedbandsforacertainperiodoftime.
PractitionersmayalsouserelatedmeasuressuchastheKeltnerchannels,ortherelatedStolleraverage
rangechannels,whichbasetheirbandwidthsondifferentmeasuresofpricevolatility,suchasthe
differencebetweendailyhighandlowprices,ratherthanonstandarddeviation.

Bollingerbandsoutsideoffinance
Inapaperpublishedin2006bytheSocietyofPhotoOpticalEngineers,"Novelmethodforpatterned
fabricinspectionusingBollingerbands",HenryY.T.NganandGranthamK.H.Pangpresentamethod
ofusingBollingerbandstodetectdefects(anomalies)inpatternedfabrics.Fromtheabstract:"Inthis
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paper,theupperbandandlowerbandofBollingerBands,whicharesensitivetoanysubtlechangeinthe
inputdata,havebeendevelopedforusetoindicatethedefectiveareasinpatternedfabric."[13]
TheInternationalCivilAviationOrganizationisusingBollingerbandstomeasuretheaccidentrateasa
safetyindicatortomeasureefficiencyofglobalsafetyinitiatives.[14]%bandbandwidtharealsousedin
thisanalysis.

Notes
1. ^WhentheaverageusedinthecalculationofBollingerBandsischangedfromasimplemovingaveragetoan
exponentialorweightedmovingaverage,itmustbechangedforboththecalculationofthemiddlebandand
thecalculationofstandarddeviation.[2]
2. ^SinceBollingerBandsusethepopulationmethodofcalculatingstandarddeviation,theproperdivisorfor
thesigmacalculationisn,notn1.

References
1. ^"BollingerBandsTrademarkDetails"(http://trademarks.justia.com/852/32/bollingerbands
85232573.html).Justia.com.20111220.
2. ^BollingerOnBollingerBandsTheSeminar,DVDIISBN9780972611107
3. ^[1](http://www.bollingerbands.com)secondparagraph,centercolumn
4. ^TechnicalAnalysis:TheCompleteResourceforFinancialMarketTechniciansbyCharlesD.Kirkpatrick
andJulieR.DahlquistChapter14
5. ^abBaiynd,AnneMarie(2011).TheTradingBook:ACompleteSolutiontoMasteringTechnicalSystems
andTradingPsychology(http://www.mcgrawhill.com.au/html/9780071766494.html).McGrawHill.p.272.
ISBN9780071766494.Retrieved20130430.
6. ^Lento,C.Gradojevic,N.Wright,C.S.(2007)."InvestmentinformationcontentinBollingerBands?".
AppliedFinancialEconomicsLetters3(4):263267.doi:10.1080/17446540701206576
(http://dx.doi.org/10.1080%2F17446540701206576).ISSN17446546(https://www.worldcat.org/issn/1744
6546).
7. ^Balsara,NauzerJ.Chen,GaryZheng,Lin(2007)."TheChineseStockMarket:AnExaminationofthe
RandomWalkModelandTechnicalTradingRules".QuarterlyJournalofBusinessandEconomics46(2):
4363.JSTOR40473435(https://www.jstor.org/stable/40473435).
8. ^Lim,ShawnHisarli,TilmanShiHe,Ng(2014)."TheProfitabilityofaCombinedSignalApproach:
BollingerBandsandtheADX".InternationalFederationofTechnicalAnalystsJournal:2329.
9. ^Rostan,PierreThoret,RaymondElmoussadek,Abdeljalil(2008)."ForecastingtheInterestRateTerm
Structure".SSRN671581(https://ssrn.com/abstract=671581).
10. ^BollingerBandTradingJohnDevcic05.11.07(http://www.forbes.com/2007/05/11/bollingerintelyahoopf
educationin_jd_0511chartroom_inl.html)
11. ^RachevSvetlozarT.,Menn,ChristianFabozzi,FrankJ.(2005),FatTailedandSkewedAssetReturn
Distributions,ImplicationsforRiskManagement,PortfolioSelection,andOptionPricing,JohnWiley,New
York

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12. ^AdamGrimes(2012).TheArt&ScienceofTechnicalAnalysis:MarketStructure,PriceAction&Trading
Strategies(http://books.google.com/books?id=Yzs_0ZkXnyAC&pg=PA196).JohnWiley&Sons.p.196
198.ISBN9781118224274.
13. ^[2](http://spiedl.aip.org/getabs/servlet/GetabsServlet?
prog=normal&id=OPEGAR000045000008087202000001&idtype=cvips&gifs=yes)OpticalEngineering,
Volume45,Issue8
14. ^[3]
(http://www.skybrary.aero/index.php/ICAO_Methodology_for_Accident_Rate_Calculation_and_Trending)
ICAOMethodologyforAccidentRateCalculationandTrendingonSKYbary

Furtherreading
Achelis,Steve.TechnicalAnalysisfromAtoZ(pp.7173).Irwin,1995.ISBN978007136348
8
Bollinger,John.BollingeronBollingerBands.McGrawHill,2002.ISBN9780071373685
Cahen,Philippe.DynamicTechnicalAnalysis.Wiley,2001.ISBN9780471899471
Kirkpatrick,CharlesD.IIDahlquist,JulieR.TechnicalAnalysis:TheCompleteResourcefor
FinancialMarketTechnicians,FTPress,2006.ISBN0131531131
Murphy,JohnJ.TechnicalAnalysisoftheFinancialMarkets(pp.209211).NewYorkInstitute
ofFinance,1999.ISBN0735200661

Externallinks
JohnBollinger'swebsite(http://www.bollingerbands.com)
JohnBollinger'swebsiteonBollingerBandanalysis(http://www.bollingeronbollingerbands.com)
December2008LosAngelesTimesprofileofJohnBollinger
(http://www.latimes.com/business/lafihimi72008dec07,0,1338099.story)
Retrievedfrom"http://en.wikipedia.org/w/index.php?title=Bollinger_Bands&oldid=626504264"
Categories: Chartoverlays Technicalindicators Statisticaldeviationanddispersion
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