Bollinger bands determine the strength of trend

Bollinger Bands
Introduction

Developed by John Bollinger, Bollinger bands are volatility bands are placed above and below the moving average. Volatility is based on standard deviation, which changes the volatility increase and decrease. The bands extend automatically when volatility increases and narrow when volatility decreases. This dynamic nature of the Bollinger bands also means that they can be used in different securities in accordance with the standard settings. For signals, Bollinger bands can be used to identify the M-W-tops and bottoms or to determine the strength of this trend. Signals received from the narrow bandwidth are discussed in the article table school of bandwidth.


Bollinger Bands Calculation

* Middle Band = 20-day simple moving average (SMA)
* Upper range = 20-day SMA + (20-day standard deviation of the price x 2)
* Lower Band = 20-day SMA - (20-day standard deviation of the price x 2)


Bollinger bands consist of the middle band with two outer bands. The middle band is a simple moving average, which is usually set at 20 periods. A simple moving average because it uses a simple moving average is also used in the standard deviation formula. The look back period for the standard deviation is the same as for a simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band.

Bollinger Bands - Table 1

Settings can be adjusted to suit the characteristics of a particular security or trading styles. Bollinger recommends making small incremental adjustments to the standard deviation multiplier. Change the number of periods moving average, also affects the number of periods used to calculate the standard deviation. Therefore, only minor adjustments needed for the standard deviation multiplier. Increase in the moving average period will automatically increase the number of periods used to calculate the standard deviation, and will also ensure an increase in standard deviation multiplier. The 20-day SMA and 20-day standard deviation, standard deviation multiplier is set to the second Bollinger proposes to increase the standard deviation multiplier of 2.1 for 50-SMA period and reducing the standard deviation of 1.9 sound for 10-SMA period.

Bollinger Bands signal: Z-DNA

Z-DNA were part of the work of Arthur Merrill that identified 16 basic models with Z form. Bollinger uses these patterns with different W Bollinger bands to identify the W-DNA. A "Z-down" forms in a downtrend and includes two reaction lows. In particular, Bollinger requires W-DNA where the second low is lower than the first, but has over the lower band. There are four steps to verify W-down with Bollinger bands. First, the low response forms. This is usually low, but not always, below the lower band. Secondly, there is bounce in the middle band. Third, there is a new lower price this low holds security over the lower band. The ability to hold above the lower band of the test shows less weakness last fall. Fourth, the model is confirmed by a strong move out of the second low resistance and break.

Bollinger Bands - Chart 2

Table 2 shows Nordstrom (JWN) with W-Bottom in January-February 2010. First, the low response actions established in January (black arrow) and broke below the lower band. Secondly, there was a bounce above the middle band. Third, the stock moved below its January low and held above the lower band. Although 5-February low spike broke the lower band, Bollinger bands are calculated using closing prices, so the signals should also be based on closing prices. Fourth, the stock rose with the expanding volume of the end of February and broke over the early February high. Table 3 shows SanDisk with smaller W-Bottom in July-August 2009.

Bollinger Bands - Figure 3


Bollinger Bands signal: M-Tops

M-tops were also part of Arthur Merrills work that has defined 16 basic models with M form. Bollinger uses these various models with M Bollinger bands to identify M bottoms. According to Bollinger, tops are usually more complicated and drawn from the bottom. Double tops, head and shoulders patterns, and diamonds represent peaks develops.

In its most basic form, the M-top is similar to the double top. However, the reaction of the highs are not always the same. The first major may be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation where the provision is the creation of new heights. This is basically the opposite of W-down. A non-confirmation occurs with three steps. First, the provision forges reaction high above the upper range. Secondly, there is a drop in the middle band. Third, prices move above previous high, but fail to reach the upper range. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which could foreshadow a trend reversal. Final confirmation comes with support or break a bearish indicator signal.

Bollinger Bands - Table 4

Table 4 shows Exxon Mobil "(XOM) with M-Top in April-May 2008. The state moved over the upper range in April. There was a retreat in May and then another pressure above the 90th Although the stock has moved above the upper range of intraday basis, it did not close above the upper range. M-top was confirmed by a break of support two weeks later. Also note that the MACD bearish divergence formed and moved below its signal line for confirmation.

Bollinger Bands - Graph 5

Figure 5 shows Pulte Homes (PHM) within an uptrend in July-August 2008. Exceeded the upper price range in early September to promote the uptrend. Once below 20-day SMA (middle Bollinger Band), shares moved higher over the 17th Despite this new high for the move, the price does not exceed the upper range. This flashed a warning sign. The state broke support, a week later and MACD moved below its signal line. Note that the M-top is more complex because there are lower highs reaction on both sides of the tip (blue arrow). The development of this top formed a small head-and shoulders pattern.


Bollinger Bands Signal: Going to Bands

Moves above or below the bands do not signals itself. As Bollinger puts it, that moves beyond the touch or bands do not signals, but "tags." On the face of it, to move to the upper band shows strength, while a sharp move lower band shows weakness. Dynamics oscillators work the same way. Overbought is not necessarily bullish. It takes strength to be reached overbought levels and overbought conditions can be expanded in a strong uptrend. Similarly, prices can "enter the group with a number of touches during a strong uptrend. Think about it for a moment. The upper range is 2 standard deviations above the 20-period simple moving average. It is a pretty strong price move on to exceed this upper range. The upper range of touch that occurs after Bollinger Band confirmed W-down to signal the start of the uptrend. Just as a strong uptrend upper band produced a number of tags, it is also common for prices not reach the lower band during the uptrend. The 20-day SMA sometimes act as support. In fact, dips below 20-day SMA sometimes provide buying opportunities before the next tag on the upper range.

Bollinger Bands - Graph 6

Figure 6 shows Air Products (APD) by increasing and close above the upper range in mid-July. First, note that this is a mighty wave that broke out two levels of resistance. Strong blow up is a sign of strength, not weakness. Trading turned flat in August and the 20-day SMA moved sideways. The Bollinger Bands narrowed, but APD did not close below the lower band. Rates and 20-day SMA, turn in September. In general, APD closed above the upper range for at least five times over a period of four months. The indicator window shows the 10-period Commodity Channel Index (CCI). Dips below -100 is considered oversold and move back above -100 signal start of oversold bounce (green dotted line). The upper range tag and breakout started uptrend. CCI then identified trading pullbacks with dips below -100. This is an example of combining Bollinger bands with momentum oscillator for trading signals.

Bollinger Bands - Graph 7

Figure 7 shows Monsanto (MON), with a walk along the lower band. The state collapsed in January with support from a break and closed below the lower band. Since mid-January to early May, Monsanto closed below the lower band at least five times. Note that the action did not close above the upper band once during this period. Support the initial break and close below the lower band signals downtrend. As such, the 10-period Commodity Channel Index (CCI) is used to identify short-term overbought situation. A move above 100 is overbought. A return under +100 signaled the continuation of a downtrend (red arrows). This system caused two good signals in early 2010.


Bollinger Bands Conclusions

Bollinger Bands reflect the direction of 20-SMA period and volatility with upper / lower bands. As such, they can be used to determine whether prices are relatively high and low. According to Bollinger, belts should contain 88-89% of the action, which makes a move outside the bands important. Technically, prices are relatively high, when the upper range and relatively low when under the lower band. However, relatively high, should not be considered as bearish or sell signal. Also, relatively low should not be considered bullish or buy signal. The prices are high or low for a reason. As with other indicators, Bollinger Bands are not intended to be used as a standalone tool. Chartists have to Bollinger bands combine basic trend analysis and other indicators for confirmation.
Bands and SharpCharts

Bollinger bands can be found in SharpCharts as price overlay. As with the simple moving average, Bollinger bands should be displayed at the top of the price plot. After choosing Bollinger bands, the default setting will appear in the window parameters (20.2). The first number (20) sets the times of the simple moving average and standard deviation. The second number (2) sets the standard deviation multiplier for upper and lower bands. These default parameters set of bands 2 standard deviations above / below the simple moving average. Users can change settings to suit their needs tracing. Bollinger Bands (50,2.1) can be used for an extended period of time or Bollinger Bands (10,1.9) can be used for a shorter timeframe. Click here for a live example.

Bollinger Bands - Sharpcharts