Bollinger Bands Metastock User Group 11 5 02 Leland Brode

Bollinger Bands Metastock User Group 11/5/02 Leland Brode elbrode@yahoo. com

Bollinger Bands - Outline n n n History Construction of Bollinger Bands Using Bollinger Bands “Bandwidth” and “%b” Building New Indicators with Bollinger Bands

History of Envelopes n “Twin-Line Chart” by Le. Doux – 1960 n n Upper band – line along monthly highs Lower band – line along monthly lows Buy when lower band exeeds upper band “Ten Day Moving Average Rule” by Keltnur – 1960 n n Establish concept of typical price (hi + lo + cl / 3) Buy and Sell lines based on Moving Avg of above

Types of Envelopes n Trading Bands n n Envelopes n n Lines above and below a central tendency Lines above and below by a % Channels n Parallel lines above and below prices

Envelope Examples – “Envelope” - 2 Moving Averages, one shifted up, the other down - Sell when reach upper envelope, buy when reach lower

Envelope Examples – “Price Channel” - Upper line is Highest High for n bars, Lowest Low for n bars - Indicate Support and Resistance lines

Envelope Examples – “Projection Bands” - Project Price over n bars forward ( completely contains prices ) - Sell when reach upper band, buy when reach lower

Envelope Examples – “Projections Bands”

Envelope Examples – “Standard Error Bands” - Bands are Standard Error above and below linear regression - Measures volatility, use with “r-squared” indicator

Bollinger Bands n n n John Bollinger – Financial News Network, “Market Technician” in 1980’s Pioneered use of Standard Deviation for construction of price envelope in 1983 Bollinger Bands are: n n n 20 bar moving average, Upper Band is 2 Standard Deviations above Mov Ave, Lower Band is 2 Standard Deviations below Mov Ave Contains 89% of all prices Shows Volatilitiy

Envelope Examples – “Bollinger Bands”

Using Bollinger Bands n “The Squeeze” n n n “Walk the Bands” n n n Low volatility followed by break-out, higher volatility Lower volatility marks end of trend, Opposite Band turns in at end of trend Indicates strong trend pullbacks to Moving Average Sideways trend n n tag of upper, followed by tag of lower band, and visa versa If cross Mov Ave, then will continue to Band

Using Bollinger Bands – The Squeeze, Walking the Bands

Using Bollinger Bands – Patterns n Relative “W”, “M” pattern Becomes - relative Buy Band Tag

Using Bollinger Bands – Patterns n Relative “W”, “M” pattern Becomes - relative Band Tag Sell

Using Bollinger Bands – Use with other indicators n n n Confirm with other indicators Bollinger Bands are a “price” indicator Use Volume indicators n Volume only: n n n On Balance Volume Trend Volume & Price: n n n n Demand Index Money Flow Price. Volume Trend Accum Distribution Intraday Intensity Chaiken AD Oscillator Volume Weighted MACD ?

Bollinger Bands – with Money Flow Index (MFI) Declining MFI confirms downtrend MFI

Using Bollinger Bands – “Bandwidth, %b” n Bandwidth n n n Bandwidth formula n n BBand. Top(CLOSE, 20, S, 2) – BBand. Bot(CLOSE, 20, S, 2) %b n n n Measures distance between upper and lower band Greater distance -> greater volatility, strong trend Use Bandwith to find “The Squeeze” Lesser distance -> lesser volatility, sideways Measures position of price relative to Bottom and Top bands Range 0 to 1: 0 indicates bottom band tag, 1 indicates top band tag, . 5 indicates in the middle %b formula n (CLOSE – BBand. Bot(CLOSE, 20, S, 2)) / Fml(“Band. Width”)

Using Bollinger Bands – Bandwidth, %b

Bollinger Bands – Applied to indicators n Apply Bollinger Bands to MFI, RSI, etc n n Shows Range of Indicator (Standard Deviation) %b of Indicator n Shows Relative Highs and Lows of indicator instead of Fixed Highs and Lows (80/20 Overbought/Oversold)

Bollinger Bands Applied to Indicators

Bollinger Bands - %b Applied to Indicators

Bollinger Band – Metas. Stock Formulas Bollinger Band Components Band. Width 1: BBand. Top(CLOSE, 20, S, 2) - BBand. Bot(CLOSE, 20, S, 2) %b: (CLOSE - BBand. Bot(CLOSE, 20, S, 2)) / Fml( "Band. Width 1") Bollinger Bands applied to Indicators Money Flow Index Band. Width. MFI: BBand. Top(MFI(14), 20, S, 2) – BBand. Bot(MFI(14), 20, S, 2) %b. MFI: (MFI(17) – BBand. Bot(MFI(17), 20, S, 2)) / Fml(“Band. Width. MFI”) Accum/Distribution Band. Width. AD: BBand. Top(AD(), 17, S, 2) – BBand. Bot(AD(), 17, S, 2) %b. AD: (AD() – BBand. Bot(AD(), 17, S, 2)) / Fml(“Band. Width. AD”) Chaiken Accum. Distr Oscillator Band. Width. ADO: BBand. Top(CO(), 20, S, 2) – BBand. Bot(CO(), 20, S, 2) %b. ADO: (ADO() – BBand. Bot(ADO(), 20, S, 2)) / Fml(“Band. Width. ADO”)

Intraday Momentum Index Band. Width. IMI: BBand. Top(IMI(17), 17, S, 2) – BBand. Bot(IMI(17), 17, S, 2) %b. IMI: (IMI(17) – BBand. Bot(IMI(17), 17, S, 2)) / Fml(“Band. Width. IMI”) Volume Band. Width. Vol: BBand. Top(VOLUME, 27, S, 2) – BBand. Bot(VOLUME, 27, S, 2) %b. Vol: (VOLUME – BBand. Bot(VOLUME, 27, S, 2)) / Fml(“Band. Width. Vol”) RSI Band. Width. RSI: BBand. Top(RSI(CLOSE, 17), 17, S, 2) – BBand. Bot(RSI(CLOSE, 17), S, 2) %b. RSI: (RSI(CLOSE, 17) – BBand. Bot(RSI, 17) 17, S, 2)) / Fml(“Band. Width. RSI”)

Generic Band. Width and %b Band. Width_20: BBand. Top(p, 20, S, 2) – BBand. Bot(p, 20, S, 2) %b_20: (p – BBand. Bot(p, 20, S, 2)) / Fml(“Band. Width_20”)

Bollinger Bands - Summary • Provide Envelope for most of price action • Shows Volatility • “The Squeeze” – sharp moves occur after Squeeze • “Walking the Bands” – move outside band, continue trend • “M” and “W” Patterns – convert to Relative M, W, trend change • A move that originates at one band goes to the other band • A cross of Moving Avg continues to next band • Confirm with other indicators (Volume indicators) • Apply Bollinger Bands to other indicators

Bollinger Bands – Bibliography • “Bollinger on Bollinger Bands”, John Bollinger • “Technical Analysis of the Financial Markets”, John Murphy • “Getting Started in Technical Analysis”, Jack Schwager • “Technical Analysis for the Trading Professional”, Constance Brown • “Technical Analysis from A to Z”, Steven Achelis