Bollinger Bands

A brief introduction to the Bollinger Band Indicator

In efforts to lead into a series of posts detailing the MarketGodPro Indicator, and the components involved with the MarketGod Series, we will be covering the fundamental components involved with the decision making you see on the indicator itself. Today, we cover one of several components in this series, the stochastic oscillator. We have also covered the Stochastic Oscillator, and the MACD Indicator

Bollinger Bands as shown via tradingview.com

Origin

Bollinger Bands consists of a center line representing the moving average of a security’s price over a certain period, and two additional parallel lines (called the trading bands) one of which is just the moving average plus k-times the standard deviation over the selected time frame, and the other being the moving average minus k-times the standard deviation over that same timeframe. This technique has been developed in the 1980’s by John Bollinger, who lately registered the terms “Bollinger Bands” as a U.S. trademark in 2011.

Generally speaking, positive slope of the bands suggests a bullish trend or uptrend while down slope suggests bearish/downtrend.

Calculation

Technical analysts typically use 20 periods and k = 2 as default settings to build Bollinger Bands, while they can choose a simple or exponential moving average. Bollinger Bands provide a relative definition of high and low prices of a security. When the security is trading within the upper band, the price is considered high, while it is considered low when the security is trading within the lower band.

Price will always bounce between the bands, which is 2 Standard Deviations outside of price, tracked by 20MA

Application

            There is no general consensus on the use of Bollinger Bands among traders. Some traders see a buy signal when the price hits the lower Bollinger Band and close their position when the price hits the moving average. Some others buy when the price crosses over the upper band and sell when the price crosses below the lower band. We can see here two opposing interpretations based on different rationales, depending whether we are in a reversal or continuation pattern. Another interesting feature of the Bollinger Bands is that they give an indication of the volatility levels; a widening gap between the upper and lower bands indicates an increasing volatility, while a narrowing band indicates a decreasing volatility. Moreover, when the bands have an almost flat slope (parallel to the x-axis) the price will generally oscillate between the bands as if trading through a channel.

Bollinger Bands and MarketGod

The Bollinger Band indicator plays a less important role than other indicators we’ve covered, but is used in application by our traders in order to see the expanding volatility and relative price movement in a given time frame. The indicator itself does not use BBands to find buys/sell, but can be applied to the chart through the MGod Indicator Settings, as one of our added on visuals.