Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices. Well, if you really think about it, your entire reasoning for changing the settings in the first place is in hopes of identifying how a security is likely to move based on its volatility. You can then sell the position on a test of the upper band. Notice how the volume exploded on the breakout and the price began to trend outside of the bands; these can be hugely profitable setups if you give them room to fly. For such reasons, it is incorrect to assume that the long-term percentage of the data that will be observed in the future outside the Bollinger Bands range will always be constrained to a certain amount.
Chart analysis with Bollinger Bands ®
John Bollinger teaches you the basics of Bollinger Bands so you can use the effectively. Bollinger on Bollinger Bands: For the 30th anniversary of Bollinger Bands, John Bollinger held a special two-day seminar teaching how to use his Bollinger Bands and which indicators to use for confirmation. The theme for the seminar was Bollinger Bands: The Market Timing Report is a collection of charts John Bollinger uses to forecast stock market movements.
It is updated weekly and is available to all BollingerBands. Commentary for the charts is provided with a Bollinger Bands Letter subscription. Click here to download this spreadsheet example. 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. 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. Indicators , Price Action , Technical Analysis.
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 action in real time and uses volatility to adjust to the current environment.
Let me walk you through the points 1 to This is a very bearish signal. Suddenly failing to reach the bands can signal fading momentum.
It tried to pull away, but bears were always in control. There are two types of tops that you need to know about:. This signal is usually accompanied by an RSI divergence. The screenshot below shows both scenarios.