Stocks & Commodities V.

30:3 (36-42, 71): Interview: System Trading Made Easy With John Bollinger by Gopalakrishnan & Faber

INTERVIEW

The Alternation Of Fear And Elation

System Trading Made

Easy With John Bollinger
John Bollinger is an analyst, author, and president and founder of Bollinger Capi-
tal Management, an investment management company that provides technically
driven money management services. Bollinger Capital Management also develops
and provides proprietary research for institutions and individuals. He may be best
known as the creator of Bollinger Bands, which he developed in the mid-1980s.
Since then, investors and traders have come to view Bollinger Bands as a reli-
able tool for assessing expected price action, and the bands are featured on most
financial charting software and websites.
Bollinger’s Capital Growth Letter, which has been published since 1987, provides
market commentary, charts, and investment advice for the average investor employ-
ing a technically driven asset allocation approach. He has also developed several
investor websites, among which are BollingerBands.com, EquityTrader.com, Bol-
lingerOnBollingerBands.com, BBScript.net, and a forex website, BBForex.com.
John Bollinger, a longtime proponent of rational analysis, the combination of
technical and fundamental analysis, was the first analyst to earn both Chartered
Financial Analyst (CFA) and Chartered Market Technician (CMT) designations.
S&C Editor Jayanthi Gopalakrishan and Staff Writer Bruce R. Faber interviewed The alternation of fear
John Bollinger via telephone on January 4, 2012. and elation dissuades
people from investing. It
pushes them away from
ohn, as you and your work are technical information. I’ve ended up the markets.
well known in our industry, with an array of new tools. I have been

J can you begin by telling us the

most recent things you’ve been
working on?
A little more than two years ago, I
had the pleasure of spending time with
Ian Woodward, who has been doing
some interesting things with Bollinger
Bands. It was an inspiring time for me.
Over the next few weeks, I realized that
I could develop an entire framework of
indicators around Bollinger Bands that
covered virtually all of the traditional
technical analysis tasks.
Where did you start?
The first result was an indicator called
BB Impulse, which quantifies price ac-
tion in relation to the bands, and from
there I went on to develop a trend in-
dicator. I next developed a momentum
indicator, and kept expanding the horizon
until I had a complete suite of indica-
tors that were all logically consistent
and drawn from the same basic pool of
able to leave behind some older tools
and replace them with better ones. It has
been a great two years.
The two projects I worked on went
way back for me. When I created Bol-
linger Bands, I created two indicators to
go with them, %b and BandWidth. %b
tells us where we are in relation to the
bands. If prices are at the upper band,
%b is 1 and if prices are at the lower
band, %b is zero. If prices are at the
middle band, %b is 0.5. BandWidth tells
you how wide the bands are. In order to
measure that, we use the middle band, or
the moving average, as a reference point.
Those were the two building blocks we
had to start with.
And what was the second project?
About that time I started thinking about
a language in which we could express
these ideas and exchange these ideas
with other technicians and others who
are interested in developing systems and
approaches to the market. Using as a basis
a logic we employed, I created a simple
computer language and called it “Trade.”
To get there we tried to overcome the
disadvantages of traditional logic for
traders. In traditional logic, everything
is black or white, one or zero, yes or no,
long or short.
But that does not really model how
traders think about the markets. So I
worked with an engineer friend and
developed a tristate logic, which was
1, 0, and ‑1. We could map that better
onto the trading process — that is, long,
flat, or short. With that, we had a logic
that modeled what traders did better. I
wrote Trade to be able to communicate
those ideas. All of these parts and pieces
started to come together in the past
couple of years.
At some point I abandoned the tristate
logic model because I realized that even
that was not sufficient to describe what

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Stocks & Commodities V. 30:3 (36-42, 71): Interview: System Trading Made Easy With John Bollinger by Gopalakrishnan & Faber
traders really did. Traders often scale
in or out of positions, or are 20% long,
or 20% short, or some variation. So we
combined the ideas of fuzzy logic from
the original tristate model and produced
a smooth-valued logic that describes how
traders function in real life.
Then the final piece was to write the
language as a computer interface to
express our ideas in a straightforward
way. We wrote a compiler that would
interpret those ideas and put them on
the screen.
It’s been a very, very active two years,
during which I pulled together a large
number of threads from past years and
combined them into a powerful frame-
work for traders.
Sounds like a lot of work. So how would
a trader use something like that?
It was an awful lot of ideas in a very
short time, so it might be better to focus
on a few of the indicators and how they
might be used.
Sure. Let’s start with BB Impulse.
BB Impulse was the first of the new
indicators, and it measures price changes
in relation to the bands. We find, for
example, that in strong markets we tend
to get a series of positive impulses. In
weak markets you tend to get a series
of negative ones. So by taking a look
at the raw values of BB Impulse on the
screen, your gaze is drawn to the essence
of what is happening in the marketplace.
If, on balance, the positive impulses are
larger than the negative ones, you are in
a rising market. If the negative impulses
are larger than the positive ones, you are
in a falling market.
This is interesting because the shift
from positive to negative can occur even
while prices go sideways. It is like an
X-ray at the interior of the momentum
of the market. So we can extend those
ideas with some decision rules. You
could say, “If in a rising environment, I
get several strong negative impulses. I
want to tighten my stops in this situation
and play a more defensive strategy.”
Likewise, if we are in a falling market
and we start to see a series of positive
impulses coming into the market, then
we can shift from a defensive strategy,
INTERVIEW
or an outright short strategy, to neutral
and then eventually to positive.
Because these signals are derived
from Bollinger Bands (BB), they adapt
to market conditions. In a consolidation
range, the strength or weakness necessary
to create a big reading in BB Impulse
is much smaller than it is in a trending
market where the bands are spread apart.
We have had basic momentum indicators
for a long time, but by framing them
with Bollinger Bands, they become
adaptive to the type of environment.
So in a consolidation range, prior to the
movement, you can see the shift from a
negative environment to a positive one.
You would not be able to pick that up with
a traditional momentum indicator.
These have probably been active in the
markets that we have seen lately.
Correct, and in this prolonged trading
range market that we have seen recently,
these tools really shine.
So the BB Impulse measures price
changes. Have you measured anything
else with some of the other indicators?
What BB Impulse does is measure the
daily change of %b. The formula for BB
Impulse is:
%b this period – %b last period
It incorporates the changing width of
the bands and at the same time it captures
price change. Price change is driving the
changes in %b, so it is a fully adaptive
framework to work with.
The sister indicator to BB Impulse is
BB Momentum. BB Momentum looks
at the momentum of price in relation to
the bands. It is the price change over a
period, say of 10 periods, as a function
of the bands. This is a momentum mea-
sure instead of being an instantaneous
momentum measure like BB Impulse.
Now it is kind of a classic momentum
measure, like the 10-day rate of change
that technicians might use, but it is
adapted to the market. In a constricted
range where the bands are tight, relatively
small amounts of momentum will show
up dramatically. When you get into a very
volatile market, such as a very strong
down period, it would take much greater
Copyright © Technical Analysis Inc.
regions of momentum to have an impact
on this indicator. All of these indicators
are scaling market activity via the lens
of Bollinger Bands.
A really interesting indicator is BB
Trend. This is perhaps the most interest-
ing for me because it helps determine
what strategies we should be employing.
BB Trend is a classic trend indicator
much like average directional index
(ADX), or other attempts that people
have made to distinguish between trend-
ing and nontrending markets. Bollinger
Bands of different periods align differ-
ently, depending on whether the market
is trending. For example, if you take
Bollinger Bands of 20 periods and 50
periods in an intermediate uptrend, you
will see that the upper bands run almost
together, aligning almost perfectly. You
will see similar behavior in a strong
downtrend with the lower bands.
So I developed a formula that takes
advantage of those relationships to tell
us whether the market was trending.
Again, it is an adaptive formula that is
based on volatility and what is happen-
ing in the markets. It is very good at
detecting trends early, just as they are
forming. It has proved to be very useful
because it tells us when to switch from
trend-following strategies to congestion,
or trading range strategies.
Does the “three pushes to a high”
— a term that George Lane used fre-
quently — apply to BB Impulse and
BB Trend?
Oh, yes. Three pushes to a high is a
great example, because you will see all
of these indicators do different things.
In three pushes to a high, BB Impulse
will produce steadily lower groupings
of positive readings as the three pushes
occur. BB Trend will start to fade and
turn down shortly after or coincident with
the second push to the high, because the
trend is starting to fail. The second push
to the high is usually the last piece of the
actual trend. It is the moment of trend
failure. The third push to the high is kind
of a retest. [See sidebar at end.—Ed.]
What you will find is that BB Trend will
keep rising or stay at a high level during
the first two phases of three pushes to a
high, and as you get to the third phase,
Stocks & Commodities V. 30:3 (36-42, 71): Interview: System Trading Made Easy With John Bollinger by Gopalakrishnan & Faber
BB Trend will have turned down. I should
say that BB Trend also recognizes the
direction of the trend, unlike the other
tools that have been developed. It runs
from +1 to ‑1.
Strong readings above zero are indi-
cations of a positive trend, and strong
readings below zero are indications of
a negative trend. In addition, BB Mo-
mentum will be producing a series of
lower highs as the three pushes occur.
The highest reading will occur either
on the first or second push. Usually, the
rule is that the reading on the third push
will be clearly lower than the readings
on either the first or second.
What George Lane did, which I think
is pretty fantastic, is that he viewed
everything through the lens of stochas-
tics. He recognized this very typical,
psychological progression as a strong
burst of momentum followed by another
strong burst, followed by a weaker burst.
There was a psychological pattern related
to those pieces and he interpreted that
pattern using stochastics.
I went back and studied stochastics
carefully. I was fortunate to have met
George Lane and I actually traveled with
him, and I learned from him.
I took the modern version of stochas-
tics, starting with %K and did a three-
period smoothing to arrive at %D, and
then did another smoothing to arrive at
slow stochastics. Since I used the formula
for stochastics to calculate %b, I also
took those two smoothings and added
them to %b and came up with %b in the
classic stochastic manner. I found that to
be a great help. It’s really made it easier
to clarify the patterns on the chart. It is
hard to deny what’s happening when
all three lines have either turned down
or turned up.
Does the interface you created combine
all these indicators?
It does. What I wanted Trade — which
we now call BB Script — to be is a
simple language that traders could use
to realize their ideas without having to
learn a programming language. So we
took Trade and converted it into a full-
on trader’s language called BB Script,
and built an interpreter for it right into
our EquityTrader.com charting package.
INTERVIEW
So you can just slip out of your chart
by clicking a tab, look at your script,
make a small change in it to fine-tune
your system, then click right back in.
That change is immediately reflected
in the chart.
That sort of power has been available
for a long time in PC-based software, but
you had to know programming. So we
did two things: we made it simple and
we took it away from the programming
world. It is a very English-like language.
It is very easy to write, very straightfor-
ward, and we made it web-based so you
don’t have to have software running on
your PC. It is a cloud-based technical lan-
guage that is also completely secure.
What kind of challenges did you con-
front developing these indicators?
As I’ve mentioned, it has been an
incredible couple of years. I’ve learned
as much in these last two as I learned
in the previous 10. It just took a little
push for me to realize that there was this
analytical framework that I could create.
Once I started working on it, the pieces
just fell into place.
One of the first ideas I had was what I
called BB Delta, which I abandoned and
replaced with BB Momentum. BB Delta
was the one-day rate of change of price
divided by Bollinger Bands. I looked
at it and decided it was an interesting
tool, but it duplicated the information
in BB Impulse.
About three months later I realized
the thing to do, instead of looking at
the one-day rate of change, was to let
the user pick the rate of change. It could
be a five-day rate of change, or 10 days,
or 20. That way, we were looking at
the classic measure of momentum in
relation to Bollinger Bands in the same
way we were looking at price changes
in relation to BB.
Making that simple little change cre-
ated what turned out to be a new and
powerful tool. But I didn’t see that at first.
I was just going to discard the concept.
Yet lying right there was a great tool. I
just had to visualize what the change was
that would make it that tool.
Sounds like you are also very passionate
about your work.
Copyright © Technical Analysis Inc.
I am more passionate about my work
now than I have been in a long time.
These two years have been inspiring,
because they have opened up new doors.
If anything, I am more interested in this
work than I was five years ago.
There are a lot of people out there who
don’t want to learn a computer language
or write code.
Yes, and that is why BB Script is so
nice. You don’t have to be a program-
mer. You can sketch these ideas out in
an English language–like interface, and
then see them as an indicator right there
on the chart.
Did George Lane have any input into
your new Bollinger Band indicators?
In the CompuTrac days, Tim Slater
would get together a panel of three to five
technical experts and we would travel to
various countries. I went on a trip with
George Lane and Manning Stoller, and
others. We made presentations in Singa-
pore, and Hong Kong, and Tokyo.
Watching George Lane teach was in-
spirational. He was a fantastic teacher. He
had real passion for his work. His father
was a Bible Belt revival-tent preacher
and George had that in him. When he got
excited he would turn up the volume and
you could see his passion for the subject.
I loved listening to him. I named %b for
the same naming procedure used for
stochastics, %K, and %D, as a homage
to George. I wanted to make sure these
people who had been pioneers in this
field got full credit for their work as I
used it for my own purposes.
Did Ian Woodward have any input into
the development of your new Bollinger
Band indicators?
Ian Woodward is an amazing guy. Like
Arthur Merrill, he had a long career in
industry — Ian as an engineer at Xerox,
Arthur as a statistician at GE. They both
took up technical analysis upon retirement
and made second careers in it. A couple
of years back, a mutual friend arranged
for Ian to drop by and show me the work
he was doing, and I was very impressed.
Here was a man nearly 80 years old
with more ideas and energy than most
people half his age. He has taken input
Stocks & Commodities V. 30:3 (36-42, 71): Interview: System Trading Made Easy With John Bollinger by Gopalakrishnan & Faber
from William O’Neil, Richard Arms, and
me and crafted an approach to investing
that seeks to identify and participate in
high-growth stocks. He gives three-day
seminars twice a year that are jam-packed
with interesting ideas. I even had one of
the guys who works for me attend. I think
that in the fullness of time he’ll be known
as one of the great analysts.
There was about a week back in early
August 2011 when the market was up
300, down 300, up 500, and down 400.
It was basically a sideways market, but it
was so volatile that I have to wonder how
that affected your new indicators.
It was the most volatile period in terms
of short-term volatility that I can recall.
I actually went back over past years’
charts trying to see if I could spot a pe-
riod where the short-term volatility had
been that high. There were a few days
in the 2007–08 debacle where we got
some very big one-day reversals, went
down huge then reversed and ended up
on the day. But I could not find another
example of this sort of alternating of big
up days and big down days.
I thought maybe the bottom in 1998
would be characterized by similar action.
If you remember, we came down sharply,
then bounced for a very short time, then
INTERVIEW
came right back down and retested the
lows, then turned on a dime and went
north. But even that, which we felt was
a very volatile period, was nothing like
what we experienced last year.
In terms of what it does to our new
Bollinger Band indicators, they reflect
that action fully. BB Momentum or BB
Impulse reflect the big price moves that
you get, but nothing breaks because
things are scaled by volatility. When
volatility is very high, then the scaling
is wide. It tends to put that activity into
perspective rather than magnify it.
Did the indicators give you any indica-
tion while it was happening as to which
way it was going to go?
If there were a system or an approach
that would have done so, I have no idea
what it would be. My tools worked pretty
well through the period and they allowed
us to recognize the bottom when it ar-
rived. But during that period where we
were getting whipped back and forth, I
don’t think anything worked, whether
it was fundamental, technical, or quan-
titative. Even pair traders were blown
up in that period because the normal
relationships between the pairs they
traded were destroyed in that volatility.
That was about as hostile a circumstance
Copyright © Technical Analysis Inc.
that the market is capable of producing
as I have ever seen.
It was one of those times when one day
you’d think you could retire now and the
next day you think you’d have to keep
working for many more years.
That’s pretty typical of how people re-
acted. The alternation of fear and elation,
I think, dissuades people from investing.
It pushes them away from the markets,
not because they made money or lost
money, but simply because the environ-
ment itself was so hostile that they have
trouble trying to figure out why in the
world they should be involved at all.
It was a pleasure talking to you, John.
Suggested reading
Bollinger, John [2001]. Bollinger On
Bollinger Bands, McGraw-Hill.
Gopalakrishnan, Jayanthi [2002]. “John
Bollinger Of Bollinger Bands Fame,”
Technical Analysis of Stocks &
Commodities, Volume 20: May.
Hartle, Thom [1997]. “John Bollinger
And Group Analysis,” Technical
Analysis of Stocks & Commodities,
Volume 15: April.
Stocks & Commodities V. 30:3 (36-42, 71): Interview: System Trading Made Easy With John Bollinger by Gopalakrishnan & Faber

THREE PUSHES TO A HIGH PATTERN

These three charts illustrate a classic technical pattern
called “three pushes to a high” delineated by Bollinger
Bands and the BB indicators %b, BandWidth, and
BBTrend.
This is a term that was popularized by the late
George Lane, generally referred to as the father of
stochastics. The “three pushes to a high” often signi-
fies the end of a long top formation. Each push has a
specific reference:

First Push
• You will see the market make a new high (its first SIDEBAR FIGURE 1: The SPDR Gold Trust ETF, GLD with Bollinger Bands
and %b. Here is an example of the three pushes to a high pattern with three lower
push), with prices often pushing themselves outside peaks in %b.
of the upper Bollinger Band.
• This is followed by a retracement that could take
prices to the middle Bollinger Band.

Second Push
• Prices make a new high at about the upper Bollinger
Band.
• This is followed by a retracement, not necessarily to
the middle Bollinger Band.

Third Push
• The final push is when price makes that last attempt
to hit a high but starts to lose momentum.

In three pushes to a high, BB Impulse will produce

steadily lower groupings of positive readings as the
three pushes occur. BB Trend will start to fade and turn
down shortly after or coincident with the second push
to the high. The second push to the high is usually the SIDEBAR FIGURE 2: The SPDR Gold Trust ETF, GLD with Bollinger Bands
last piece of the actual trend. It is the moment of trend and BandWidth. Here is an example of the three pushes to a high pattern with
failure. The third push to the high is a retest. BandWidth turning down on the second push.

What you will find is that BB Trend will keep ris-

ing or stay at a high level during the first two phases
of three pushes to a high, and as you get to the third
phase, BB Trend will have turned down. BB Trend
also recognizes the direction of the trend.
Strong readings above zero are indications of a
positive trend, and strong readings below zero are
indications of a negative trend. BB Momentum will be
producing a series of lower highs as the three pushes
occur. The highest reading will occur either on the first
or second push. Usually, the rule is that the reading on
the third push will be clearly lower than the readings
on either the first or second.
Lane viewed everything through the lens of stochas-
tics. He recognized this psychological progression
as a strong burst of momentum followed by another
strong burst, followed by a weaker one. There was a
psychological pattern related to those pieces and he SIDEBAR FIGURE 3: The SPDR Gold Trust ETF, GLD with Bollinger
interpreted that pattern using stochastics. Bands and BBTrend. Here is an example of the three pushes to a high pattern
with BBTrend turning down on the third push.

Copyright © Technical Analysis Inc.

Stocks & Commodities V. 30:3 (36-42, 71): Interview: System Trading Made Easy With John Bollinger by Gopalakrishnan & Faber

INTERVIEW

BOLLINGER BAND SUITE n %BandWidth

The following tools make up the Bollinger Band suite of → Where is BandWidth in relation to history?
technical analysis tools.
This BB indicator focuses on trend:
Bands and envelopes:
n BBTrend
n Bollinger Bands (for markets where the trading session → Are prices trending and, if so, in what direction?
is well defined)
—John Bollinger
n Bollinger Envelopes (for markets where the session
definition is poor)
→ Are prices high or low? BBScript
This BBScript plots the BBmomentum indicator.
This group of BB indicators focus on price action:
// Copyright John Bollinger, CFA, CMT 2012
n %b (This was the first BB indicator.) // www.EquityTrader.com
// use the data from the chart
→ Where are we in relation to the Bollinger Bands? data("x")
n BBImpluse // use the close
myClose = close(x)
Instantaneous price action in relation to the Bollinger // middle BB
Bands. middleBB = sma(myClose, 20)
// volatility
n BBMomentum (A single-period version of this called vol = stdev(myClose, 20)
“BBDelta” was the first of the new indicators.) // upperBB
→ What is momentum in relation to the Bollinger Bands? upperBB = middleBB + 2 * vol
// lower BB
lowerBB = middleBB - 2 * vol
This group of BB indicators focus on volatility: // momentum
mtm = myClose - myClose[-10]
n BandWidth (This was the second BB indicator.) // BB momentum
BBmtm = mtm / (upperBB - lowerBB)
→ How wide are the Bollinger Bands? // create the plot objects
myPlot = plot(BBmtm, "BBmtm", "histogram","CC0000")
n BandWidth Delta
// draw the charts using the plot objects
→ Are the Bollinger Bands expanding or contracting? chart(myPlot)

—John Bollinger

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