Let's look at the period of December 22, ,to December 27, Volatility is based on the standard deviation , which changes as volatility increases and decreases. At the end of the day, bands are a means for measuring volatility.
BREAKING DOWN 'Bollinger Band®'
That bit of information is incredibly valuable. It is even more powerful if combined with other tools such as other indicators for confirmation. Using the SPY as a surrogate so we can calculate volume indicators, we find that both day Intraday Intensity and Accumulation Distribution are quite positive, suggesting that if a breakout were to occur here it would be to the upside. That stands in marked contrast to our more cautious approach to the market as a whole, so we will be monitoring this set-up quite carefully Bollinger On Bollinger Bands.
John Bollinger developed Bollinger Bands in the early s and since their introduction 30 years ago they have become one of the most widely used technical indicators worldwide. Learn how to use Bollinger Bands from the man who developed them. So, I wanted to do my own research and I looked at the most recent price swings of Bitcoin in the Tradingsim platform.
Let's look at the period of December 22, ,to December 27, During this period, Bitcoin ran from a low of 12, to a high of 16, Let's unpack this a little further. Do you realize that these gains were largely made over 3 days' worth of trading?
I am getting a little older now and hopefully a little wiser and that kind of money that fast, I have learned is almost impossible for me to grasp. The psychological warfare of the highs and the lows become unmanageable. So, it got me thinking, would applying bands to a chart of bitcoin futures have helped with making the right trade? I indicated on the chart where bitcoin closed outside of the bands as a possible turning point for both the rally and the selloff.
But let's be honest here, this is a minute chart of a highly volatile security. You must honestly ask yourself will you have the discipline to make split second decisions to time this trade, just right? The one thing the bands manages to do as promised is contain the price action, even on something as wild as bitcoin.
I honestly find it hard to determine when bitcoin is going to take a turn looking at the bands. It's not that the bands are doing anything wrong or not working.
Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room for error. I personally do not trade bitcoin, but after looking at the most recent price swing using bands a couple of things come to mind:. Pairing the Bollinger Band width indicator with Bollinger Bands is like combining the perfect red wine and meat combo you can find.
In the previous section, we talked about staying away from changing the settings. Well, if you really think about it, your entire reasoning for changing the settings in the first place is in hopes of identifying how a security is likely to move based on its volatility.
A much easier way of doing this is to use the Bollinger Bands width. In short, the BB width indicator measures the spread of the bands to the moving average to gauge the volatility of a stock. Well, now you have an actual reading of the volatility of a security, you can then look back over months or years to see if there are any repeatable patterns of how price reacts when it hits extremes.
Still, don't believe me? Look at the below screenshot using both the Bollinger Bands and Bollinger Band width. Notice how the Bollinger Band width tested the. The other point of note is that on each prior test, the high of the indicator made a new high, which implied the volatility was expanding after each quiet period. As a trader, you need to separate the idea of a low reading with the Bollinger Bands width indicator with the decrease in price.
If you had just looked at the bands, it would be nearly impossible to know that a pending move was coming. You would have no way of knowing that. This is just another example of why it's important to pair Bollinger Bands with other indicators and not use it as a standalone tool. The above chart is of the E-Mini Futures.
I want to dig into the E-Mini because the rule of thumb is that the smart money will move the futures market which in turn driveS the cash market. Looking at the chart of the E-mini futures, the peak candle was completely inside of the bands.
Other than the fact the E-mini was riding the bands for months, how would you have known there was a big break coming? Now that I have built up tremendous anticipation, let's see if there is a way to identify an edge.
Remember in Chapter 4, the Bollinger Band width can give an early indication of a pending move as volatility increases. In the above example, the volatility of the E-Mini had two breakouts prior to price peaking. If that wasn't enough to convince you, then the second break above the 8-month swing high of the Bollinger Band width was your second sign.
After these early indications, the price went on to make a sharp move lower and the Bollinger Band width value spiked. The inspiration for this section is from the movie Teenage Mutant Ninja Turtles, where Michelangelo gets super excited about a slice of pizza and compares it to a funny video of a cat playing chopsticks with chopsticks. Does anything jump out that would lead you to believe an expanse in volatility is likely to occur? Let me tell you, when you are trading in real-time, the last thing you want to do is come late to a party.
More times than not, you will be the one left on cleanup after everyone else has had their fun. It was very subtle, but you can see how the bands were coiling tighter and tighter from September through December.
During this time, the VIXY respected the middle band. There was one period in late November when the candlesticks slightly jumped over the middle line, but the candles were red and immediately rolled over. However, in late January, you can see the candlesticks not only closed above the middle line, but also started to print green candles. Now, one could argue that this wasn't enough information to make a trading decision. That is a fair statement. You would need a trained eye and have a good handle with market breadth indicators to know that this was the start of something real.
There is the obvious climactic volume which jumps off the chart, but there was a slight pickup in late January, which was another indicator that the smart money was starting to cash in profits before the start of spring break. This gives you an idea of what topics related to bands are important to other traders according to Google.
Why is this important? It's safe to say bands is probably one of the most popular technical indicators in any trading platform. If memory serves me correctly, Bollinger Bands, moving averages and volume were likely my first taste of the life.
Well as of today, I no longer use bands in my trading. That doesn't mean they can't work for you, but my trading style requires me to use a clean chart. Therefore, the more signals on the chart, the more likely I am to act in response to said signal.
This is where the bands expose my trading flaw. For example, if a stock explodes above the bands, what do you think is running through my mind? You guessed right, sell! The stock could just be starting its glorious move to the heavens, but I am unable to mentally handle the move because all I can think about is the stock needs to come back inside of the bands. Instead of taking the time to practice, I was determined to turn a profit immediately and was testing out different ideas.
I decided to scalp trade. I would sell every time the price hit the top bands and buy when it hit the lower band. It's really bad, I know. From what I remember, I tried this technique for about a week, and at the end of this test, I had made Tradestation rich with commissions.
The key flaw in my approach is that I did not combine bands with any other indicator. This left me putting on so many trades that at the end day, my head was spinning. Flashback to , when I was just starting out in day trading; I had no idea what I was doing. One of the first indicators I put to the test was Bollinger Bands. It's one of the most popular indicators. Al Hill Click to tweet.
At the end of the day, bands are a means for measuring volatility. So, it's not something you can just pick up and use for buy and sell signals. Just as you need to learn specific price patterns, you also need to find out how bands respond to certain price movements. This level of mastery only comes from placing hundreds, if not thousands of trades in the same market. The thing that surprised me is that I couldn't find many other famous authors or experts in the space.
A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal.
Final confirmation comes with a support break or bearish indicator signal. The stock moved above the upper band in April. There was a pullback in May and then another push above Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band.
The M-Top was confirmed with a support break two weeks later. Also, notice that MACD formed a bearish divergence and moved below its signal line for confirmation.
Price exceeded the upper band in early September to affirm the uptrend. After a pullback below the day SMA middle Bollinger Band , the stock moved to a higher high above Despite this new high for the move, price did not exceed the upper band. This flashed a warning sign. The stock broke support a week later and MACD moved below its signal line. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak blue arrow.
This evolving top formed a small head-and-shoulders pattern. Moves above or below the bands are not signals per se. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness.
Momentum oscillators work much the same way. Overbought is not necessarily bullish. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Think about it for a moment. The upper band is 2 standard deviations above the period simple moving average. It takes a pretty strong price move to exceed this upper band.
An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend. The day SMA sometimes acts as support. In fact, dips below the day SMA sometimes provide buying opportunities before the next tag of the upper band.
First, notice that this is a strong surge that broke above two resistance levels. A strong upward thrust is a sign of strength, not weakness. Trading turned flat in August and the day SMA moved sideways.
Prices and the day SMA turned up in September.