Bollinger Bands

You are not obsessed with getting in a position and it wildly swinging in your favor. BandWidth also rose as prices moved sharply in one direction and Bollinger Bands widened. This alerts chartists to prepare for a move, but direction depends on the subsequent band break. Further refinement and analysis are required. I'm not sure if this is because there aren't many people interested or if other traders stay out of the bands arena because John is so actively evangelizing the bands. Click here to learn how to enable JavaScript. Navigation menu Personal tools Log in.

A Bollinger Band® is a set of lines plotted two standard deviations (positively and negatively) away from a simple moving average of the security's price. A Bollinger Band®, developed by famous technical trader John Bollinger, is normally plotted two standard deviations away from a simple moving average but can be adjusted to user preferences.

Introduction

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. Settings can be adjusted to suit the characteristics of particular securities or trading styles. Bollinger recommends making small incremental adjustments to the standard deviation multiplier. Changing the number of periods for the moving average also affects the number of periods used to calculate the standard deviation.

Therefore, only small adjustments are required for the standard deviation multiplier. An increase in the moving average period would automatically increase the number of periods used to calculate the standard deviation and would also warrant an increase in the standard deviation multiplier.

Bollinger suggests increasing the standard deviation multiplier to 2. W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape.

In particular, Bollinger looks for W-Bottoms where the second low is lower than the first but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band.

Second, there is a bounce towards the middle band. Third, there is a new price low in the security. This low holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break. First, the stock formed a reaction low in January black arrow and broke below the lower band. Second, there was a bounce back above the middle band. Third, the stock moved below its January low and held above the lower band.

Even though the 5-Feb spike low broke the lower band, Bollinger Bands are calculated using closing prices so signals should also be based on closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high. M-Tops were also part of Arthur Merrill's work that identified 16 patterns with a basic M shape. According to Bollinger, tops are usually more complicated and drawn out than bottoms. Double tops, head-and-shoulders patterns, and diamonds represent evolving tops.

In its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal. The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs.

This is basically the opposite of the W-Bottom. A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal.

Final confirmation comes with a support break or bearish indicator signal. The stock moved above the upper band in April. There was a pullback in May and then another push above Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band.

The M-Top was confirmed with a support break two weeks later. Also, notice that MACD formed a bearish divergence and moved below its signal line for confirmation. Price exceeded the upper band in early September to affirm the uptrend. After a pullback below the day SMA middle Bollinger Band , the stock moved to a higher high above Despite this new high for the move, price did not exceed the upper band. This flashed a warning sign. The stock broke support a week later and MACD moved below its signal line.

Notice that this M-top is more complex because there are lower reaction highs on either side of the peak blue arrow.

This evolving top formed a small head-and-shoulders pattern. Moves above or below the bands are not signals per se.

On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. BandWidth dipped below 10 to put the Squeeze play on in mid-June. Even though this level seems high, it is actually quite low for ALK.

With the subsequent surge above the upper band, the stock broke out to trigger an extended advance. A horizontal line was added to the indicator window. This line marks 8, which is deemed relatively low based on the historical range. The BandWidth indicator alerted traders to be ready for a move in mid-August. The stock obliged with a surge above the upper band and continued higher throughout September.

The advance stalled in late September and BandWidth narrowed again in October. Notice how BandWidth declined below the lows set in August and then flattened out. The subsequent break below the lower Bollinger Band triggered a bearish signal in late October. The Squeeze can also be applied to weekly charts or longer timeframes.

Volatility and BandWidth are typically higher on the weekly timeframe than a daily timeframe. This makes sense because larger price movements can be expected over longer timeframes. As the consolidation narrowed and a triangle formed, Bollinger Bands contracted and BandWidth dipped below 10 in January Notice how BandWidth remained at low levels as the consolidation extended.

A bullish signal triggered with the breakout in July BandWidth also rose as prices moved sharply in one direction and Bollinger Bands widened. Chart 5 shows Honeywell HON with an extended trading range in the area. There was a move to the upper band in May, but no breakout for a signal. Instead, HON clearly broke below the lower band to trigger a bearish signal in June This alerts chartists to prepare for a move, but direction depends on the subsequent band break.

A squeeze followed by a break above the upper band is bullish, while a squeeze followed by a break below the lower band is bearish. Be careful of head-fakes however. Sometimes the first break fails to hold as prices reverse the other way. Strong breaks hold and seldom look back. An upside breakout followed by an immediate pullback should serve as a warning. Bollinger BandWidth can be found in the indicator list on SharpCharts.

The default parameters 20,2 are based on the default parameters for Bollinger Bands. These can be changed accordingly. BandWidth can be positioned above, below or behind the price plot. Click here to see a live example of BandWidth. A shaded delta icon shows percentage change. A white delta icon shows absolute levels. Green boxes show stocks with relatively wide BandWidth.

Light boxes show stocks with relatively narrow BandWidth. A list of the stocks with the narrowest BandWidth is shown at the bottom right of the Market Carpet Bottom 5. Click the names to see a small chart above.

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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. Definition of 'Bollinger Bands' Definition: Bollinger Bands is one of the popular technical analysis tools, where three different lines are drawn, with one below and one above the security price line. Bollinger Bands ® are among the most reliable and potent trading indicators traders can choose from. They can be used to read the trend strength, to time entries during range markets and to find potential market tops. The indicator is also not a lagging indicator because it always adjusts to price.