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Bollinger Bands Essentials Class 1
Class 1 Introduction ToBollinger 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
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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
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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
Donchain Channel
Keltner Bands
Percent Band Envelopes
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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
Too Loose Here
Worked “OK” Here
Percent Band Envelopes
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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 Band ComponentsKey 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
Bollinger Bands
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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
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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
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Bollinger Bands Essentials Class 1
Settings & VariationsPrimary 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
These are some “possible” alternative settings. John Bollinger contends the primary settings of 20 and 2 are still the best settings.
Motive Wave
Trade Navigator
Alternate Settings
Periods Std. Dev.
John Bollinger’s Alternates
10 1.9
20 2
50 2.1
Other “popular” alternates
18 1.8
14 2
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Bollinger Bands Essentials Class 1
The Main PlaysThe 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
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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
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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
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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
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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
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