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Bollinger Bands Essentials 1

This document provides an introduction to Bollinger Bands, including their history and key components. It was created by John Bollinger as a trading guide. The summary covers: 1) Bollinger Bands were developed by John Bollinger in the 1980s as a volatility-based envelope system to define relative price highs and lows. 2) They consist of a simple moving average in the middle and upper and lower bands that are placed at a set number of standard deviations above and below the moving average. 3) The main Bollinger Band trading strategies are the squeeze, false breakout, walking the band, and reversal plays, which look for breaks of the bands or contractions to enter new trends.

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Kiran Kudtarkar
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613 views13 pages

Bollinger Bands Essentials 1

This document provides an introduction to Bollinger Bands, including their history and key components. It was created by John Bollinger as a trading guide. The summary covers: 1) Bollinger Bands were developed by John Bollinger in the 1980s as a volatility-based envelope system to define relative price highs and lows. 2) They consist of a simple moving average in the middle and upper and lower bands that are placed at a set number of standard deviations above and below the moving average. 3) The main Bollinger Band trading strategies are the squeeze, false breakout, walking the band, and reversal plays, which look for breaks of the bands or contractions to enter new trends.

Uploaded by

Kiran Kudtarkar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 13

Bollinger Bands Essentials Class 1

Class 1 Introduction To



Bollinger Band Trading
Overview:
• History of Bollinger Bands
• Bollinger Band Components
• Settings & Variations
• The Main Plays Objectives

History of Bollinger Bands


What are Bollinger Bands?
“Bollinger Bands are bands
drawn in and around the price
structure on a chart. Their
purpose is to provide relative
definitions of high and low
prices.
- John Bollinger: from
Bollinger on Bollinger Bands


PAGE 1
Bollinger Bands Essentials Class 1

John Bollinger
• Former analyst on Financial News Network (later CNBC)
• Bollinger Capital Management
• Creator of the Bollinger Bands
• A Modern Technical Analysis Titan!
Why B. Bands are Powerful
• Show where a stock is high or low on a relative basis
• Reveal stock trends
• Provide visual trade setups that are easy to identify
• Can be a complete trading system
5 Steps of Trade Confirmation
1. Support & Resistance
2. Identify the trend
3. Chart Patterns
4. Candlestick Patterns
5. Indicators
Indicator vs. Overlay
• Bands, like indicators, derive their signals from the OHLC
• Slightly different in that the presentation is an “overlay”
• More like clouds than indicators
• Can replace other techniques

PAGE 2
Bollinger Bands Essentials Class 1

Trading Band Systems


• Trading Band Systems are not new
• MA Percent Bands were well known by the 1950s
• Chester Keltner “perfected” the bands in the 60’s
• Richard Donchian (Donchian channel)
The Concept
• Intended to encompass “most” of the price action
• Push beyond the envelopes represents an extreme
• Helps establish trends
• Helps identify overbought/oversold

Percent Band Envelopes

Keltner Bands

Donchain Channel

PAGE 3
Bollinger Bands Essentials Class 1

They Worked
• All of these systems worked
• Donchian was/is probably the best
• Bollinger was working with the percent system and frustrated
• The challenge was setting the bands correctly
Volatility is the Problem
• Discovered that volatility was the key messing up the bands
• Needed a way to allow the bands to expand regardless of how volatility looked
• Needed a relative system rather than an absolute system

Worked “OK” Here

Too Loose Here

Percent Band Envelopes

PAGE 4
Bollinger Bands Essentials Class 1

The Solution
• A band system based on a standard deviation
• Allowed for the volatility
• In the end created a band system that encompasses approximately 90% of the price

Bollinger Bands

Bollinger Band Components


Key Components
• Moving Average
• Upper & lower band
• Standard deviation
Moving Average
• Used to define the intermediate trend
• Bollinger always uses the simple ave.
• Works just like any other moving average setup:
➡ Above the average = Bullish
➡ Below the average = Bearish

PAGE 5
Bollinger Bands Essentials Class 1

The Bands
• The bands establish the upper and lower range of the trade
• Bollinger uses a standard deviation calculation to allow for volatility
• Bands expand as the average price movement increases and contract when it decreases

PAGE 6
Bollinger Bands Essentials Class 1

Combination
• With these components we can use the Bollinger bands to:
➡ Define relative highs and lows
➡ Define trends
➡ Define a structure for price analysis

Confirmation Tools
• Candles
• W & M Patterns
• Some indicators

PAGE 7
Bollinger Bands Essentials Class 1

Settings & Variations


Primary Settings
• Moving Average = 20 SMA*
• Band average = 20
• Standard Deviation = 2.0
*Use of an exponential Moving Average will not improve the performance of the band system

Motive Wave

Trade Navigator

Alternate Settings
Periods Std. Dev. These are some “possible” alternative
John Bollinger’s Alternates settings. John Bollinger contends the
primary settings of 20 and 2 are still
10 1.9 the best settings.
20 2

50 2.1

Other “popular” alternates


18 1.8

14 2

PAGE 8
Bollinger Bands Essentials Class 1

The Main Plays


The Main Plays
• The Squeeze
• The False Break
• Walking the Band
• The Reversal

The Squeeze
• During periods of low volatility the bands will squeeze together
• This contraction can only last for a little bit of time
• When it breaks out it typically leads to a new trend

PAGE 9
Bollinger Bands Essentials Class 1

The False Break


• This trade starts as a BB Squeeze
• The trade breaks to one side
• Within 2-4 sessions it displays candlestick reversal signals
• Take the trade in the opposite direction to the other side of the band

PAGE 10
Bollinger Bands Essentials Class 1

Walking The Band


• This is the “trend trade”
• Stock will “walk” between the upper and middle band, or the lower and middle band, as
the trend progresses
• This is very similar to a moving average trend trade

PAGE 11
Bollinger Bands Essentials Class 1

The Reversal
• Bands provide a framework for the price action of the stock
• M patterns and W patterns will appear inside the bands
• These typically lead to reversals and provide insight

PAGE 12
Bollinger Bands Essentials Class 1

Homework
• Set up the bands in your charting software
• Pull up several stocks and look for the main plays
• Take note of how they have played out in the past

PAGE 13

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