Bollinger Bands

Bollinger Bands, from John Bollinger, wrap a moving average in a volatility envelope. The bands widen when recent closes have been dispersed and tighten when closes have clustered. They are a description of the recent distribution, not a channel the market is obliged to respect. A tag of the upper band is a close that is high relative to the last 20 closes. In a trend that happens often, and the price can walk the band.

The useful reading is the squeeze and the walk. A squeeze, bands at their narrowest in a long time, says the recent dispersion collapsed. It does not say which way the next move goes. A walk along the upper band, closes repeatedly near it, is a strong trend, not an automatic short. Bollinger's own warning was not to sell a tag of the band. Use other tools, such as a momentum oscillator, for confirmation, and use price structure for the trade.

After a squeeze, a close that holds outside the upper band, with a rising middle band, is the trend-following long. In a range, a tag of the lower band that reverses back inside, at support, is the mean-reversion long. These are opposite trades. Name which one you are taking.

A close that holds outside the lower band, with a falling middle band, is the trend-following short. A tag of the upper band that fails, at resistance, is the mean-reversion short. Walking the lower band is weakness, not a buy.

Fading every band tag. In the trends that pay trend followers, price lives on the band. Also using 20 and 2 on every timeframe without noticing that a 20-bar window on a one-minute chart is twenty minutes, and on a daily chart it is a month.

Standard deviation uses the same closes you are judging, so a crash widens the bands after the crash has happened. The bands do not predict the spike. They describe it once it is in the window. And they contain no volume.