They were created by John Bollinger in the early 1980s. The purpose of these bands is to give you a relative definition of high and low. So in theory, the prices are high at the upper band and then are low at the lower band. Bollinger Bands include three different lines. The upper, middle, and lower band. The middle band basically serves as a base for both the upper and lower.
After examining the picture, it may seem wise to buy every time the price hits the lower band. Or, on the other hand, sell every time the price hits the upper band. This can technically work but is a risky way of trading using the Bollinger Bands. Sometimes strong trends will ride these bands and end up stopping out many unfortunate traders who used that method.
This means that when the Bollinger bands squeeze, the price tends to make a big move in either direction. The longer the BB squeeze, the higher the probability the price will eventually penetrate one band or the other.
Bollinger Bands are a type of price envelope developed by John Bollinger. (Price envelopes define upper and lower price range levels.) Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price. Because the distance of the bands is based on standard deviation, they adjust to volatility swings in the underlying price.
Bollinger bands help determine whether prices are high or low on a relative basis. They are used in pairs, both upper and lower bands and in conjunction with a moving average. Further, the pair of bands is not intended to be used on its own. Use the pair to confirm signals given with other indicators.
Developed by John Bollinger, Bollinger Bands® are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases. The bands automatically widen when volatility increases and contract when volatility decreases. Their dynamic nature allows them to be used on different securities with the standard settings.
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.
Bollinger Bands can be found in SharpCharts as a price overlay. As with a simple moving average, Bollinger Bands should be shown on top of a price plot. Upon selecting Bollinger Bands, the default setting will appear in the parameters window (20,2). The first number (20) sets the periods for the simple moving average and the standard deviation. The second number (2) sets the standard deviation multiplier for the upper and lower bands. These default parameters set the bands 2 standard deviations above/below the simple moving average. Users can change the parameters to suit their charting needs. A Bollinger Band overlay can be set at (50,2.1) for a longer timeframe or at (10,1.9) for a shorter timeframe.
Bollinger Bands (/ˈbɒlɪndʒər/) are a type of statistical chart characterizing the prices and volatility over time of a financial instrument or commodity, using a formulaic method propounded by John Bollinger in the 1980s. Financial traders employ these charts as a methodical tool to inform trading decisions, control automated trading systems, or as a component of technical analysis. Bollinger Bands display a graphical band (the envelope maximum and minimum of moving averages, similar to Keltner or Donchian channels) and volatility (expressed by the width of the envelope) in one two-dimensional chart.
BBImpulse measures price change as a function of the bands; percent bandwidth (%b) normalizes the width of the bands over time; and bandwidth delta quantifies the changing width of the bands.
%b (pronounced "percent b") is derived from the formula for stochastics and shows where price is in relation to the bands. %b equals 1 at the upper band and 0 at the lower band. Writing upperBB for the upper Bollinger Band, lowerBB for the lower Bollinger Band, and last for the last (price) value:
The use of Bollinger Bands varies widely among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Moreover, the use of Bollinger Bands is not confined to stock traders; options traders, most notably implied volatility traders, often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert towards the average historical volatility level for the stock.
When the bands lie close together, a period of low volatility is indicated. Conversely, as the bands expand, an increase in price action/market volatility is indicated. When the bands have only a slight slope and track approximately parallel for an extended time, the price will generally be found to oscillate between the bands as though in a channel.
Traders are often inclined to use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility.
Bollinger bands have been applied to manufacturing data to detect defects (anomalies) in patterned fabrics. In this application, the upper and lower bands of Bollinger Bands are sensitive to subtle changes in the input data obtained from samples.
The International Civil Aviation Organization is using Bollinger bands to measure the accident rate as a safety indicator to measure efficacy of global safety initiatives. %b and bandwidth are also used in this analysis.
Bollinger bands are to trading what Shakespeare is to literature, very important and really hard to avoid if you are trying to make a mark in the world of trading. Bollinger band is a technical indicator used to analyse the market in a better manner and help us in making better assumptions on the price of an asset ie if it is overbought or oversold.
In a similar manner, instead of a 5-day moving average, for Bollinger bands, we use the 20-day moving average. A sample is shown below. (Data is taken for Tesla from 13 October 2018 to 16 October 2018)
The reason why the upper and lower Bollinger bands are two standard deviations away from the moving average is that this makes an envelope around the closing price and contains the majority of the price action. Statistically, two standard deviation includes 95% of price movement. Thus, any time the closing price goes below or above the Bollinger bands, there are high chances for breakout or price reversion, and hence it can be used a signal.
Bollinger bands help us to understand the volatility of an asset. When the market is strongly bullish (or bearish), due to their inherent properties, the Bollinger Band envelope will widen dramatically. In low volatility periods, or when the price of the asset is pretty much stagnant, the Bollinger Band envelop shrinks, effectively squeezing against the SMA.
While the double bottoms strategy is not exactly unique to the Bollinger bands, it can be used efficiently with it. In a double bottom setup, as the name suggests, we are looking for a W shaped formation where the price closes below the lower band once before increasing the next period for a short while, only to close below the lower Bollinger band again.
The primary indicator used for trading the squeeze set up is the Bollinger band. The Bollinger band is a volatility based band wherein the upper and lower bands are constructed using the 20 day simple moving average line, and has a default setting of two standard deviations on either side of the centerline. One of the most noticeable characteristics of the Bollinger band is that the majority of the price action will be contained within the upper and lower boundaries. The bands will expand and contract based on the recent market activity.
One of the important characteristics of Bollinger bands is that as markets become more volatile the bands will tend to widen. And when the markets become less volatile the bands will tend to narrow. This is an important feature within the Bollinger band that we should keep in mind, especially as it relates to the Bollinger band squeeze set up that will be demonstrating shortly.
A trader can use the Bollinger band study in a number of different ways. Mean reverting traders sometimes utilize Bollinger bands to define statistically significant upper and lower limits that prices are likely to trade within. For example, in a range bound market, a trader may consider a price that reaches the upper limit of the Bollinger band as a sign of an overbought market. And conversely, a trader may consider a price that reaches the lower limit of the Bollinger band as an indication of an oversold market.
The Bollinger bands are shown as the two green lines that are overlaid on the price chart. The Bollinger band width indicator is shown on the lower pane as a single green line. The default settings have been used for both the Bollinger band and the Band width indicator.
Keep in mind that the default setting for the Bollinger band is a 20 period simple moving average as the centerline with a two standard deviation that comprises the upper and lower bands. For the Keltner channel, the default setting is the 20 period simple moving average with a 1.5 X ATR multiplier. The green bands represent the Bollinger band indicator, and that blue bands represent the Keltner channel. 2b1af7f3a8