Traders Indicator Toolbox – Bollinger Bands ®

The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. This Week learn all about Bollinger Bands (for a free 2-week trial CLICK HERE)

Developed by John Bollinger in the 1980’s. Bollinger Bands ® can be used to measure the volatility of the price relative to previous trades. Bollinger Bands®

 

%B plots the instrument’s price relative to the upper and lower Bollinger Bands®. %B can be used to identify overbought and oversold conditions.

 

Bollinger Band Width plots the distance between the upper and lower Bollinger Bands®. This graph line represents the contraction and expansion of the bands based on recent volatility. A high BB width often indicates a slowing trend while a low width indicates a forming trend.

Bollinger Bands ®

INTRODUCTION

Bollinger Bands ® are a popular indicator developed by John Bollinger in the 1980’s. You will often hear mention of price bands or envelope bands. That is what the Bollinger Bands® are. Bollinger Bands® are derived by taking a simple 20-day moving average and adding a number to get a top band and subtracting a number to get a bottom band.

The “number” is 2 standard deviations added to the moving average for the top band and subtracted from the moving average for the bottom band. The way standard deviations work is that 95% of the time, price will fall within 2 standard deviations of a move, which means that when price trades above 2 standard deviations, it will likely come back quickly. In other words, it is overbought.

It is also a measure of volatility. When the market takes price too far too fast, the Bollinger Bands® alerts us to that fact. It keeps us from buying highs and selling lows. A 20-day period is optimal for calculating Bollinger Bands. It is descriptive of the intermediate-term trend and has achieved wide acceptance. The short-term trend seems well served by the 10-day calculations and the long-term trend by 50-day calculations. What about using Fibonacci averages like 8, 21 and 55? Sound familiar? Test it out on your preferred markets!

The average that is selected should be descriptive of the chosen time frame. This will almost always be different average lengths than the one that proves most useful for crossover buys and sells. The easiest way to identify the proper average is to choose one that provides support to the correction of the first move up off a bottom. If the average is penetrated by the correction, then the average is too short. If, in turn, the correction falls short of the average, then the average is too long. An average that is correctly chosen will provide support far more often than it is broken.

bollinger bands

USING THE TOOL

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Jody
Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.
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Jody

Jody

Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.

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