PLEASE REMEMBER THIS IS FOR EDUCATIONAL PURPOSES ONLY!
Greetings Everyone,
Once again, we come across another tool that is very familiar to most, but the settings, application, and interaction with other tools / indicators is usually met with…HUH! So first of all, what are Bollinger Bands and how did they get started.
Bollinger Bands were created by John Bollinger who is the President and founder of Bollinger Capital Management. Mr. Bollinger’s site can be reached at www.bollingerbands.com. If you want to read the book directly from the author, you can find it here: Bollinger on Bollinger Bands
According to Mr. Bollinger, the origins of Bollinger bands started with trading bands. Well that’s great, what are trading bands. In this session, we will look at trading bands, in the following sessions; we will get more into Bollinger. Trading bands are merely a group of lines that usually encompass the majority of price action over a given time-frame. For example, the chart below shows how the price action on a given time frame is enclosed in a price envelope. The chart was formed by using a combination of the MA.B or Moving Average Bands tool and a simple moving average.
The first step in creating the chart was to first determine what moving average I wanted to include. The one I randomly chose was the 20 day simple moving average close. This gives me the green line in the center of the chart. The second step was to overlay the moving average bands. The moving average bands were also set to the close for a period of 20 days and a plus 5% and -5% for the band width. The percentages for the MA.B are a matter of preference, but to make the bands look correct, the periods should be the same. Here are the properties boxes for the Simple Moving Average followed by the properties box of the Moving Average Bands.
Simple Moving Average Properties
Moving Average Bands Properties
So what have we created? We have created two parallel lines that are a set percentage distance from the moving average. This does not mean that we have to make the parallel line equal in distance because we could easily go back to the Moving Average Bands properties box and adjust the Top or Bottom percent field to our individual preferences. Here is an example with the Top percent field remaining at 5% while the bottom has been reduced to 2 %.
Trading Bands with Reduced Lower Percentage Band
Ok, now that we have Trading Bands out of the way, how is Bollinger different than Trading bands, and how can I use it. For now, Bollinger Bands calculate the distance of the bands from the moving average based upon Standard Deviation. Standard Deviation! Oh no, what have I gotten myself into.
Continued in Part 2
Later Fibonacci
PLEASE REMEMBER THIS IS FOR EDUCATIONAL PURPOSES ONLY!
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