Bollinger Bands

A technical tool known as “Bollinger Bands” indicates the S&P has been as quiet as it has been in 22 years, just before the launch of a five-year rally in which the index more than tripled.

In , Butler et al. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. The use of Bollinger Bands varies widely among traders. Breakout Dead cat bounce Dow theory Elliott wave principle Market trend.

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Bollinger Bands are technical indicator used to identify the possible trend reversal and buy or sell signals. Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average and the two outer bands are set 2 standard deviation.

Closes above the upper band often signal a short-term reversal. When prices close above the upper Bollinger band, they can be thought of as too high. Of course, the future will not be like the past and this type of winning percentage is unlikely to be repeated going forward. The trade would be closed when the price came back down to the moving average, which is shown as the center line in Figure 1. On average, trades have lasted about five days. Prices pierced the upper Bollinger band on November 4.

A pullback followed, as expected. For those thinking this article is merely the work of Captain Hindsight, remember that this signal has historically worked well a large percentage of the time. It could be useful to track this as a means of spotting short-term trading opportunities.

He is also the author of "Smarter Investing in Any Economy: Article Usefulness 5 most useful 4 3 2 1 least useful. Traders are often inclined to use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline.

If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. In , Lento et al. The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets.

Similar results were found in another study, which concluded that Bollinger Band trading strategies may be effective in the Chinese marketplace, stating: A recent study examined the application of Bollinger Band trading strategies combined with the ADX for Equity Market indices with similar results.

A paper from uses Bollinger Bands to reduce variance in a Monte Carlo simulation used to forecast the Canadian treasury bill yield curve. In , Butler et al. Their results indicated that by tuning the parameters to a particular asset for a particular market environment, the out-of-sample trading signals were improved compared to the default parameters.

Companies like Forbes suggest that the use of Bollinger Bands is a simple and often an effective strategy but stop-loss orders should be used to mitigate losses from market pressure. Security price returns have no known statistical distribution , normal or otherwise; they are known to have fat tails , compared to a normal distribution. Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices.

Just the opposite is true; it is well recognized by practitioners that such price series are very commonly serially correlated [ citation needed ] —that is, each price will be closely related to its ancestor "most of the time". Adjusting for serial correlation is the purpose of moving standard deviations , which use deviations from the moving average , but the possibility remains of high order price autocorrelation not accounted for by simple differencing from the moving average.

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. Practitioners may also use related measures such as the Keltner channels , or the related Stoller average range channels, which base their band widths on different measures of price volatility, such as the difference between daily high and low prices, rather than on standard deviation.

Bollinger bands have been applied to manufacturing data to detect defects anomalies in patterned fabrics. The International Civil Aviation Organization is using Bollinger bands to measure the accident rate as a safety indicator to measure efficacy of global safety initiatives. From Wikipedia, the free encyclopedia. Kirkpatrick and Julie R. Applied Financial Economics Letters. Quarterly Journal of Business and Economics. Bollinger Bands and the ADX". International Federation of Technical Analysts Journal: Particle Swarm Optimization of Bollinger Bands.

International Conference on Swarm Intelligence. Breakout Dead cat bounce Dow theory Elliott wave principle Market trend.

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