Technical Analysis of Stocks - Bollinger Bands
- Thread starter bhuwanpatel
- Start date
According to John Bollinger and mentioned at http://www.bollingerbands.com/services/bb/?page=6
A cardinal rule for the successful use of technical analysis requires avoiding multicolinearity amid indicators. Multicolinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.
So one indicator derived from closing prices, another from volume and the last from price range would provide a useful group of indicators. But combining RSI, moving average convergence/divergence (MACD) and rate of change (assuming all were derived from closing prices and used similar time spans) would not.
Here are, however, three indicators to use with bands to generate buys and sells without running into problems. Amid indicators derived from price alone, RSI is a good choice. Closing prices and volume combine to produce on-balance volume, another good choice. Finally, price range and volume combine to produce money flow, again a good choice. None is too highly colinear and thus together combine for a good grouping of technical tools. Many others could have been chosen as well: MACD could be substituted for RSI, for example.
A cardinal rule for the successful use of technical analysis requires avoiding multicolinearity amid indicators. Multicolinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example.
So one indicator derived from closing prices, another from volume and the last from price range would provide a useful group of indicators. But combining RSI, moving average convergence/divergence (MACD) and rate of change (assuming all were derived from closing prices and used similar time spans) would not.
Here are, however, three indicators to use with bands to generate buys and sells without running into problems. Amid indicators derived from price alone, RSI is a good choice. Closing prices and volume combine to produce on-balance volume, another good choice. Finally, price range and volume combine to produce money flow, again a good choice. None is too highly colinear and thus together combine for a good grouping of technical tools. Many others could have been chosen as well: MACD could be substituted for RSI, for example.
Very well explained as a concept. I once saw a very expperienced broker use bollinger bands primarily for his day trading system. The primary rules of bolliger band apart( like low volatility begets high and vice-versa), wonder what all is one supposed to see.
As I understand the three prime function are
Identifying continous trends
Defining trading ranges
Recognizing the squeeze
Some important exracts in a book from Mr Bollinger:-
Momentum peaks and troughs will occur outside the Bollinger Bands and subsequent price peaks and troughs occurs inside the Bollinger Bands.
The second low which is inside the band is higher on a relative basis even if lower on an absolute basisif first is ouside and second is inside. It is better if the middle is penetrated.
Price should near and not touch the lower band on the initial pass then trading only halfway between lowerband and the middleband on the retest.
For a downturn- A shoulder outside the upper Bollinger Band, a head that tagged the upper band and a right shoulder that failed well short of the upper band. Neckline should coincide with the middle and right shoulder and the first shoulder at the first decline should stop at the lower band.
A high made outside the band followed by a new high inside the bands is always suspect, especially if the second new high fails to tag the upper band. High made outside the upper band, a pullback, a tag of the upper band, a pullback and then a final rally that fails to achieve the upper band at all.
Throwback rally should stop at the middle band and the first leg down should break the lower band.
Typically the first push will be outside the upper band, the second move should make a new high and touch the upper band and the third push may make a marginal new high more ofthen than not but will fail to tag the band.
During an adcvance closes outside the band forms continuation signals
A weakening of the ability for price to get outside the bands will often warn that an advance/decline is in its waning days
Confusing isn't it, haha. Well you are supposed to see all this Best of luck. This may help a little
http://www.investopedia.com/articles/technical/102201.asp
Next we can take the bandwidth and the %b indicator if you have the apetite for them. Bolo? bolo? Your thoughts will linger quite a while- another bollinger hehe.
As I understand the three prime function are
Identifying continous trends
Defining trading ranges
Recognizing the squeeze
Some important exracts in a book from Mr Bollinger:-
Momentum peaks and troughs will occur outside the Bollinger Bands and subsequent price peaks and troughs occurs inside the Bollinger Bands.
The second low which is inside the band is higher on a relative basis even if lower on an absolute basisif first is ouside and second is inside. It is better if the middle is penetrated.
Price should near and not touch the lower band on the initial pass then trading only halfway between lowerband and the middleband on the retest.
For a downturn- A shoulder outside the upper Bollinger Band, a head that tagged the upper band and a right shoulder that failed well short of the upper band. Neckline should coincide with the middle and right shoulder and the first shoulder at the first decline should stop at the lower band.
A high made outside the band followed by a new high inside the bands is always suspect, especially if the second new high fails to tag the upper band. High made outside the upper band, a pullback, a tag of the upper band, a pullback and then a final rally that fails to achieve the upper band at all.
Throwback rally should stop at the middle band and the first leg down should break the lower band.
Typically the first push will be outside the upper band, the second move should make a new high and touch the upper band and the third push may make a marginal new high more ofthen than not but will fail to tag the band.
During an adcvance closes outside the band forms continuation signals
A weakening of the ability for price to get outside the bands will often warn that an advance/decline is in its waning days
Confusing isn't it, haha. Well you are supposed to see all this Best of luck. This may help a little
http://www.investopedia.com/articles/technical/102201.asp
Next we can take the bandwidth and the %b indicator if you have the apetite for them. Bolo? bolo? Your thoughts will linger quite a while- another bollinger hehe.
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