Bollinger Bands by John Bollinger for Metastock

maestro

almost 14 years ago

Metastock

Trading bands are one of the most powerful concepts available to the technically based investor, but they do not, as is commonly believed, give absolute buy and sell signals based on price touching the bands. What they do is answer the perennial question of whether prices are high or low on a relative basis. Armed with this information, an intelligent investor can make buy and sell decisions by using indicators to confirm price action.

But before we begin, we need a definition of what we are dealing with. Trading bands are lines plotted in and around the price structure to form an ’’envelope". It is the action of prices near the edges of the envelope that we are particularly interested in….

Taken from Stocks & Commodities, V. 10:2 (47-51): Using Bollinger Bands by John Bollinger

For further interpretation refer to the above article found in the February 1992 issue of Technical Analysis of Stocks and Commodities.

Bollinger Bands are built into MetaStock™, however you may prefer to use the individual custom formulas.

Bollinger Bands are envelopes which surround the price bars on a chart. Bollinger Bands are plotted two standard deviations away from a simple moving average. This is the primary difference between Bollinger Bands and envelopes. Envelopes are plotted a fixed percentage above and below a moving average. Because standard deviation is a measure of volatility, the Bollinger Bands adjust themselves to the market conditions. They widen during volatile market periods and contract during less volatile periods. Bollinger Bands become moving standard deviation bands.

Bollinger Bands are displayed with a third line. This is the simple moving average line. The time period for this moving average can vary. However, Mr. Bollinger recommends 10 days for short term trading, 20 days for intermediate term trading, and 50 days for longer term trading.

Additionally, the standard deviation value can be varied. Many technicians increase the value of the standard deviation from 2 standard deviations to 2-1/2 standard deviations away from the moving average when using a 50 day moving average. Conversely, many technicians lower the value of the standard deviation from 2 to 1-1/2 standard deviations away from the moving average when using a 10 day moving average.

An important thing to keep in mind is that Bollinger Bands do not generate buy and sell signals alone. They should be used with another indicator. I prefer to use Bollinger Bands with RSI. This is because when price touches one of the bands, it could indicate one of two things. It could indicate a continuation of the trend; or it could indicate a reaction the other way. So Bollinger Bands used by themselves what they need to know. Which is when to buy and sell. MACD could be substituted for RSI.

However, when combined with an indicator such as RSI, they become quite powerful. RSI is an excellent indicator with respect to overbought and oversold conditions. Generally, when price touches the upper Bollinger Band, and RSI is below 70, we have an indication that the trend will continue. Conversely, when price touches the lower Bollinger Band, and RSI is above 30, we have an indication that the trend should continue.

If we run into a situation where price touches the upper Bollinger Band and RSI is above 70 (possibly approaching 80) we have an indication that the trend may reverse itself and move downward. On the other hand, if price touches the lower Bollinger Band and RSI is below 30 (possibly approaching 20) we have an indication that the trend may reverse itself and move upward.

Above, I have talked about the use of a second indicator to work with Bollinger Bands. Avoid the trap of using several different indicators all working off the same input data. If you’re using RSI with the Bollinger Bands, don’t use MACD too. They both rely on the same inputs. You might consider using On Balance Volume, or Money Flow. RSI, On Balance Volume, and Money Flow, rely on different inputs. They measure different things. They can be used together as further confirmation of a trend. The technical term for this is ‘Avoiding Multicolinearity’.

Charles J. Kaplan, President, Equity Analytics, Ltd

Indicator / Formula

((mov(C,20,S) + (2*(std(C,20))) - (mov(C,20,S) - (2*(std(C,20)))) / mov(C,20,S)))

mov( C,20,S ) + ( 2 * ( std( C ,20 ) ) )

mov( C,20,S ) - ( 2 * ( std( C ,20 ) ) )

mov( C,20,S )

Periods:=Input("Dlugosć sredniej -",5,50,20);
; {Upp} Mov( C, Periods, S ) + ( 2 * Stdev( C, Periods ))
; {Mid} Mov( C, Periods, S )
; {Low} Mov( C, Periods, S ) - ( 2 * Stdev( C, Periods ))

( ( C+2 * std( C,20 ) - mov( C,20,S ) ) / ( 4 * std( C,20 ) ) ) * 100

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