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22 Bollinger Band Rules

The document outlines 22 rules for using Bollinger Bands, a technical analysis tool developed by John Bollinger. The rules discuss how to define high and low prices using the bands, how to combine the bands with indicators, adjusting the band parameters, identifying divergences and squeezes, and applying the bands to different financial instruments and timeframes. The document also provides background on John Bollinger and suggests additional resources to learn about using Bollinger Bands.

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1K views4 pages

22 Bollinger Band Rules

The document outlines 22 rules for using Bollinger Bands, a technical analysis tool developed by John Bollinger. The rules discuss how to define high and low prices using the bands, how to combine the bands with indicators, adjusting the band parameters, identifying divergences and squeezes, and applying the bands to different financial instruments and timeframes. The document also provides background on John Bollinger and suggests additional resources to learn about using Bollinger Bands.

Uploaded by

ravee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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22

BOLLINGER BAND
RULES
BY THE CREATOR & FINANCIAL ANALYST
JOHN BOLLINGER
RULES
1. Bollinger Bands provide a relative definition of high and low. By definition
price is high at the upper band and low at the lower band.

2. That relative definition can be used to compare price action and indicator
action to arrive at rigorous buy and sell decisions.

3. Appropriate indicators can be derived from momentum, volume, sentiment,


open interest, inter-market data, etc.

4. If more than one indicator is used the indicators should not be directly
related to one another. For example, a momentum indicator might
complement a volume indicator successfully, but two momentum indicators
aren't better than one.

5. Bollinger Bands can be used in pattern recognition to define/clarify pure


price patterns such as "M" tops and "W" bottoms, momentum shifts, etc.

6. Tags of the bands are just that, tags not signals. A tag of the upper
Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower
Bollinger Band is NOT in-and-of-itself a buy signal.

7. In trending markets price can, and does, walk up the upper Bollinger Band
and down the lower Bollinger Band.

8. Closes outside the Bollinger Bands are initially continuation signals, not
reversal signals. (This has been the basis for many successful volatility
breakout systems.)

9. The default parameters of 20 periods for the moving average and standard
deviation calculations, and two standard deviations for the width of the bands
are just that, defaults. The actual parameters needed for any given
market/task may be different.

10. The average deployed as the middle Bollinger Band should not be the
best one for crossovers. Rather, it should be descriptive of the intermediate-
term trend.

11. For consistent price containment: If the average is lengthened the


number of standard deviations needs to be increased; from 2 at 20 periods,
to 2.1 at 50 periods. Likewise, if the average is shortened the number of

2
standard deviations should be reduced; from 2 at 20 periods, to 1.9 at 10
periods.

12. Traditional Bollinger Bands are based upon a simple moving average.
This is because a simple average is used in the standard deviation
calculation and we wish to be logically consistent.

13. Exponential Bollinger Bands eliminate sudden changes in the width of the
bands caused by large price changes exiting the back of the calculation
window. Exponential averages must be used for BOTH the middle band and
in the calculation of standard deviation.

14. Make no statistical assumptions based on the use of the standard


deviation calculation in the construction of the bands. The distribution of
security prices is non-normal and the typical sample size in most
deployments of Bollinger Bands is too small for statistical significance. (In
practice we typically find 90%, not 95%, of the data inside Bollinger Bands
with the default parameters).

15. %b tells us where we are in relation to the Bollinger Bands. The position
within the bands is calculated using an adaptation of the formula for
Stochastics.

16. %b has many uses; among the more important are identification of
divergences, pattern recognition and the coding of trading systems using
Bollinger Bands.

17. Indicators can be normalized with %b, eliminating fixed thresholds in the
process. To do this plot 50-period or longer Bollinger Bands on an indicator
and then calculate %b of the indicator.

18. BandWidth tells us how wide the Bollinger Bands are. The raw width is
normalized using the middle band. Using the default parameters BandWidth
is four times the coefficient of variation.

19. BandWidth has many uses. Its most popular use is to identify "The
Squeeze", but is also useful in identifying trend changes.

20. Bollinger Bands can be used on most financial time series, including
equities, indices, foreign exchange, commodities, futures, options and bonds.

21. Bollinger Bands can be used on bars of any length, 5 minutes, one hour,
daily, weekly, etc. The key is that the bars must contain enough activity to
give a robust picture of the price-formation mechanism at work.

3
22. Bollinger Bands do not provide continuous advice; rather they help
identify setups where the odds may be in your favor.

ABOUT THE CREATOR


John A. Bollinger is an American author, financial analyst, contributor to the field of
technical analysis and the developer of Bollinger Bands.
You can find detailed books and methodologies of his work by visiting his website
www.bollingerbands.com.

GET MARKET INSIGHTS


Joel Kruger provides daily technical and fundamental analysis on
JKonFX.com. Get your free reports by becoming a member. Also, you can
learn about the Market through the Beginners Guide to Forex.

Email: joel@jkonfx.com
Twitter: @JoelKruger

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