BROWSE

Bollinger bands

Bollinger bands saw its inception back in the late 20th century when John Bollinger – the creator of Bollinger bands – found a way to predict the changes in the short-term security market.

What exactly are Bollinger bands?

In the simplest of terms, Bollinger Bands is a graph that helps investors in predicting the fluctuations in the prices of securities hold in the near future. As the name indicates, the graph is based on two bands – called trading bands. There is a higher trading band and a lower trading band on the graph, both of which are plotted by taking into account the average of a pre-determined number of prices.

How does it work?

To understand Bollinger Bands, it is important that you know the concepts of moving average and volatility.

Moving average

Moving average is an indicator that is concerned with smoothing out the random fluctuations in a price of security. It helps in providing you a stable average based on the prices in the past.

Volatility

Volatility and standard deviation are inter-related. Basically it is the rate with which the security prices increase or decrease within a particular set of returns (time periods).

Now that you briefly understand these concepts, it will be easier for you to understand how Bollinger Bands work. Since the trading bands in this graph are based on the standard deviation, they are highly concerned with the volatility of prices in the past.

When the market is running smoothly, the price of a particular security will always remain between the bands. This means that there is very little fluctuation in the rate with which these securities are bought and sold. The bands in this case come close to each other. This process id called contraction.

On the other hand, if the market is more volatile, then these bands will move away from the simple moving average - denoted by a central line within the trading bands. This process is called the expansion.

How do I read Bollinger Bands?

One of the most basic tricks of reading the Bollinger bands is watching out for the different periods of volatility. When the trading bands come very close to each other (contraction) and consequently close to the moving average, it is for a fact then that the near future of the security will see an expansion.

In other words, if the Bollinger Bands start coming closer to each other, it is a sign that they will move away from each other very soon. This means that there would be a window of opportunity for trading the share. Remember that a Bollinger Band only represents a particular set of shares issued by a company, which means that every set of shares has its own Bollinger Band.


Further Reading


Investment information content in Bollinger Bands?
www.tandfonline.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

An empirical comparison of moving average envelopes and Bollinger BandsAn empirical comparison of moving average envelopes and Bollinger Bands
www.tandfonline.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

Particle swarm optimization of bollinger bandsParticle swarm optimization of bollinger bands
link.springer.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

Combining value averaging and Bollinger Band for an ETF trading strategyCombining value averaging and Bollinger Band for an ETF trading strategy
www.tandfonline.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

Popularity versus Profitability: Evidence from Bollinger BandsPopularity versus Profitability: Evidence from Bollinger Bands
jpm.pm-research.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

Big data analytics: a trading strategy of NSE stocks using bollinger bands analysisBig data analytics: a trading strategy of NSE stocks using bollinger bands analysis
link.springer.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

Calibration of bollinger bands parameters for trading strategy development in the baltic stock marketCalibration of bollinger bands parameters for trading strategy development in the baltic stock market
www.inzeko.ktu.lt [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

Empirical optimization of Bollinger Bands for profitabilityEmpirical optimization of Bollinger Bands for profitability
papers.ssrn.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …

Technical financial analysis tools for StataTechnical financial analysis tools for Stata
journals.sagepub.com [PDF]
This article tests the profitability of Bollinger Bands (BB) technical indicators. It is found that, after adjusting for transaction costs, the BB are consistently unable to earn profits in excess of the buy-and-hold trading strategy. However, the profitability is improved using a …



Q&A About Bollinger bands


When did Mr. Bollinger first introduce his concept on Financial News Network?

In 1987 during a program with no name given by Mr. Bollinger himself, he introduced it as "Bollinger Bands."

What is Bollinger bands?

Bollinger bands are a graph that helps investors predict the fluctuations in the price of securities.

When will there be little fluctuation in price?

When market is running smoothly, there will be little fluctuation in price.

How do you understand volatility and standard deviation?

Volatility and standard deviation are interrelated. Basically it is the rate with which security prices increase or decrease within a particular set of returns (time periods).

What does John Bollinger do?

John Bollinger is a financial analyst and the developer of Bollinger Bands.

What happens when market becomes more volatile?

In this case, these trading bands move away from each other. This process id called contraction. On the other hand, if the market is more volatile, then these trading bands will move away from each other. This process id called expansion."

How does Bollinger bands work?

The graph is based on two trading bands, which are plotted by taking into account the average of a pre-determined number of prices.

What are some of Mr. Bollinger's contributions?

His contribution was to use volatility to make trading bands adaptive.

How did Mr. Bollinger develop his bands?

He developed them in the early 198s while trading options. At the time, fixed width trading bands were used, but he wanted to use volatility to make his bands adaptive.