Bollinger Bands

[whitster]

look, ANY widely disseminated indicator or method is almost always USELESS as a trade signal

because the market adapts to itself. it's called a feedback loop

however... are BB's a useful measure of volatility? of course. can they be incorporated into a successful methodology? yes. but in most markets, simply buying or selling based on a BB indication would be insane

that's not a robust strategy.

 

[Bearbelly]

I wonder how these big time pros keep track of all this sh*t.

 

[terminator]

BB's: superb exit indicator. crap for all other uses.

 

[pumpkinhead]

Quote from Spxdes:

I would like to discuss the use of bollinger bands as a great way of helping one read price action. There is no need for any other indicator to base trading decisions. The bands tell you everything...trend, range, volatility, support/resistance, chop, etc.

The chart attached shows a 5 min chart of DE for the last three days.

What are your bands set at?

 

[Spxdes]

Let me try to explain myself better....

I never ever said that bollinger bands were the holy grail. There is no indicator that is. I only wanted to show how they could be used as a GUIDE to reading the price action. That is why I wouldn't trust any backtest on it or any indicator for that matter. It's not for mechanical use. At least not how I would use it.

With that said, I like to use a 8 period band with a std dev of 2. I take out the middle line and replace it with a 4 period sma offset +1. I also use pivot points, both daily and weekly along with the widely used 34 sma.

 

[Spxdes]

Another fun chart....

 

[RhinoTrader]

Quote from piezoe:

I am compelled to correct my earlier post where i wrote:
"....there is a only a five percent chance of the price moving further away from the mean."

This should be 2.5% not 5%, since in the normal, symmetrical, unskewed distribution 95% of the area is incorporated between plus and minus 1.96 sigma leaving just 2.5% under each tail.

well, really you should feel compelled to withdraw your comment completely

In all seriousness, your statement may lead people seriously astray. Not sure if you are just expressing yourself poorly but the statement as written is just wrong.

Even if stock price movements were normally distributed (which they're not), once the price reaches a point 2 SDs from the mean the probability of a further move in that direction is neither 5% nor 2.5%.

The 95% statistic refers to the probability that a price sitting at its average will not vary outside of its 2 SD range. The stats only work BEFORE the move. Once the market is at one of the BBs, Gaussian (i.e. normal dist) theory (which the 95% stat is based on) would still suggest an equal probability (50%) of a move up or down.

 

[Pro_Trader720]

Distribution of 30 min es chart with 20 period moving average attached.

Quote from piezoe:

(It is Sat. night, it is cold and rainy, and generally miserable outside, so rather than watch George Foreman demostrate his new weenie cooker i decided to haunt these forums.)

I want to throw in a little comment here regarding the interpretation of Bollinger's bands. It is often said that when prices stray two standard deviations from their mean, that "there is a only a five percent chance of the price moving further away from the mean." Or other equivalent and equally incorrect statements. Bollinger, himself, to my knowledge, never made such an error of interpretation. I read his book ages ago.

That business of assigning probabilities comes straight out of statistics for a normally distributed population with a fixed and known population standard deviation. In that case, it is true that 95% of observations that might be drawn from the population would fall, on average, between plus or minus 1.96 standard deviations of the population mean.

But i have never seen any data that would suggest that individual stock prices observed for finite periods are normally distributed about the mean. anyone in this forum have any idea what the distribution function of prices about the mean actually looks like? I would be most curious to know, and of course delighted if the distribution actually did obey Gauss's function. Surely there are some Ph.D. physicists toiling late into the night for Goldman that could shed light on this issue. Or perhaps one of you guys with access to raw time and price data will plot the actual distribution out so we can see what it looks like.

In the meantime, we ought not to attribute specific % probabilites to price interceptions of the bands. Not anyway until we hear definitively from the physicists. There is nothing at all wrong with calculation of the standard deviation, however, since in any case that calculation is going to give us the most efficient estimate of the price scatter. Whoever said here that the bands give us a measure of volatility was certainly correct -- but it is not correct to attach specific probabilities without knowing what the form of the distribution function is.

Now, there, don't you'all wish i'd go back to Foreman and his weenie roaster?

 

[JimmyJam]

Thanks for brining this thread to the attention of the ET readers Spxdes.

Bollinger Bands can be used to measure among other things, range, volatility, determine whether a marketing is trending or cycling, and if integrated with other indicators will most certainly make for a very robust system.

I personally wouldn't trade without them.

Do I win on every trade?, of course not.

But the wins far outweigh the losses in terms of size and quantity, and by recording my trades they give me a very good barometer on the state of the markets.

Good trading,

Jimmy Jam

 

[Spxdes]

Quote from JimmyJam:

Thanks for brining this thread to the attention of the ET readers Spxdes.

Bollinger Bands can be used to measure among other things, range, volatility, determine whether a marketing is trending or cycling, and if integrated with other indicators will most certainly make for a very robust system.

I personally wouldn't trade without them.

Do I win on every trade?, of course not.

But the wins far outweigh the losses in terms of size and quantity, and by recording my trades they give me a very good barometer on the state of the markets.

Good trading,

Jimmy Jam

Thanks Jimmy!

Hey, are you the same JimmyJam as the guy on dacharts.com ???