This article is based on John Bollinger Book – Bollinger Bands. I shared this 15 Basic Rules for using Bollinger Bands for refference only.
15 Basic Rules to remember regarding Bollinger Bands:
- Bollinger Bands provide a relative definition of high and low.
- That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
- Appropriate indicators can be derived from momentum, volume, sentiment, open interest, open market data, etc.
- Volatility and trend already have been deployed in the construction of the Bollinger Bands, so their use for confirmation of price action is not recommended.
- The indicators used for confirmation should not be directly related to one another. Two indicators from the same category do not increase confirmation. Avoid collinearity.
- Bollinger Bands can be used for clarify pure price patterns such as M-type tops and W-type bottoms, momentum shifts, etc.
- Price can, and does, walk up the upper Bollinger Band and down the Bollinger Band.
- Closes out side the Bollinger Bands can be continuation signal, not reversal signal-as is demonstrated by the use of Bollinger Bands in some very successful volatility-break-out system.
- The default parameter of 20 periods for calculating the moving average and standard deviations for the BandWidth are just that, defaults. The actual parameters needed for any given market or task may be different.
- The average deployed should not be the best one for crossover signal. Rather, it should be descriptive of the intermediate-term trend.
- If the average is lengthened, the number of standard deviations needed to be increased simultaneously-from 2 at 20 periods to 2.1 at 50 periods. Likewise, if the average is shortened, the number of standard deviations should be reduced-from 2 at 20 periods, to 1.9 at 10 periods.
- Bollinger Bands are based upon a simple moving average. This is because a simple moving average is used in the standard deviation calculation and we wish to be logically consistent.
- Be careful about making statistical assumptions based on the use of standard deviation calculation in the construction of the bands. The sample size is most deployments of Bollinger Bands is too small for statistical significance, and the distributions involved are rarely normal.
- Indicators can be normalized with %b, eliminating fixed thresholds in the process.
- Finally, tags of the bands are just that-tags, not signal. A tag of the upper Bollinger Bands is not in and of itself a sell signal. A tag of the lower Bollinger Bands is not in and of itself a buy signal.
Source: Book of Bollinger on Bollinger Bands, by John Bollinger.
Watch these three Video Tutorials from Mr. John Bollinger:
Note from me: As always like I said, indicators printed after after price exist!