Bollinger Bands

Bollinger bands or Bollinger Bands are one in the 1980s developed by John Bollinger methods for chart analysis. Based on the normal distribution, it is assumed that current prices of a security with a higher probability in the vicinity of the average value of past courses are as far from it.

In order to identify price trends, three values ​​are used to determine. First, using the method of the moving average of the average price is usually the last 20 days calculated. Then the course will be two more from the empirical standard deviation calculated "bands" " circled ". The calculated standard deviation with a predetermined factor ( Bollinger recommended value of 2 ) times, and then this value is added to or subtracted from the previously calculated average.

Bollinger Bands consist of:

• A middle band, consisting of the arithmetic moving average (simple moving average ) of the last days is calculated

• An upper band ( band entry ), which is calculated by dividing the standard deviation multiplied by a certain factor k, and the result thereof is then added to the mean.

• A lower band (exit band), which is calculated by dividing the standard deviation is multiplied with a certain factor k, and this is then subtracted from the mean.

Often for days and for assumed, but other values ​​are possible.

By the factor k is the width of the gap between the upper and lower band is controlled. Assuming that the prices of the next time step ( t 1) are random and normally distributed, you will find the course with a probability depending on k within the band gap between entry and exit band.So is this probability, for example, by a factor

The values ​​of the percentage values ​​are derived from the respective quantiles of the normal distribution.

Interpretation

The most common interpretation is as follows: A course near the upper or lower band is interpreted as a signal for a short-term move to another band. But forms a plateau at one of the two bands and repeats this, a new trend is to be expected. The convergence of the upper and lower band in the direction of the moving average implies a larger price movement, the direction can not be determined. However, breaks the course of the channel from which the continuation of this motion is adopted.

John Bollinger, however, says that the tapes themselves give only information about whether a title is currently trading relatively cheap or relatively expensive. To generate valid trading signals, the parameters also developed by Bollinger % b and Bandwidth ( bandwidth) must be observed. Since these additional parameters, however (stock software or websites with chart facilities) are very rarely available in standard applications, Bollinger Bands are usually misinterpreted because important information is missing.

In practice, Bollinger Bands are often used to make buy and sell decisions. It is e.g. fairly simple, based on a longer-term development to check the price development on extraordinary fluctuations ( trend-following breakout systems ). Exceeds the price of the upper band, rising prices are expected. This so-called long position will be dissolved again ( closed ) when the price falls below the upper, middle or lower band. In a reverse course thus falling prices are expected. However, the Bollinger bands are in their theoretical approach is not to designed to make buying or selling decisions. They are only intended to determine whether a course is undervalued or not reached.

Criticism

The tapes can not, as assumed by some proponents to make reliable statements about the probability that the price will be within a certain distance to the moving average. So would be the assumption that the price is in 95 % of cases within the Bollinger Bands, as false as the assumption that the course follows the moving average. This is primarily because the moving average actually does not meet the requirements of an expected value and the assumption of normal distribution of price movements in the stock market is not true. Based on current information, the stock market movements follow any known distribution function ( Benoît Mandelbrot observed in his works a power law distribution, which, however, the linear analysis extracts ). Furthermore, the Bollinger Bands assume that the standard deviation is known, which is not the case here. The standard deviation as described above is an uncertain estimate of the true offset.

Nevertheless, this method of analysis has proved in practice to be reliable means for the visualization of price volatility. Bollinger had even indicated that the touch of the course, no particular significance should be attached to the upper or lower band, and that additional factors should be used for investment decision.

Interestingly, the masses of erroneous interpretation of Bollinger Bands on incorrect statistical assumptions, this made ​​based that some retailers consider these movements as the sole trading signal. In this respect, we can speak of self-fulfilling prophecy here.