Transcript Envelope Examples – “Envelope”

Bollinger Bands
Metastock User Group
11/5/02
Leland Brode
[email protected]
Bollinger Bands - Outline
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History
Construction of Bollinger Bands
Using Bollinger Bands
“Bandwidth” and “%b”
Building New Indicators with Bollinger
Bands
History of Envelopes
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“Twin-Line Chart” by LeDoux – 1960
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Upper band – line along monthly highs
Lower band – line along monthly lows
Buy when lower band exeeds upper band
“Ten Day Moving Average Rule” by Keltnur –
1960
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Establish concept of typical price (hi + lo + cl / 3)
Buy and Sell lines based on Moving Avg of above
Types of Envelopes
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Trading Bands
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Envelopes
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Lines above and below a central tendency
Lines above and below by a %
Channels
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Parallel lines above and below prices
Envelope Examples – “Envelope”
- 2 Moving Averages, one shifted up, the other down
- Sell when reach upper envelope, buy when reach lower
WA L M A RT S T O RE S (5 5 .0 0 0 0, 5 7 .0 0 00 , 5 4 .6 8 00 , 5 6. 4 70 0 , +0. 40 0 0 0 )
Enve lope
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Envelope Examples – “Price Channel”
- Upper line is Highest High for n bars, Lowest Low for n bars
- Indicate Support and Resistance lines
S T O RE S (5 5 .0 0 0 0, 5 7 .0 0 00 , 5 4 .6 8 00 , 5 6.4 70 0 , +0.40 0 0 0 ), Price Ch an n e l (5 8 .0 25 0 ), P ri ce Ch
6 5a n ne l (4 8 .5
Price Channe l
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Envelope Examples – “Projection Bands”
- Project Price over n bars forward ( completely contains prices )
- Sell when reach upper band, buy when reach lower
WM T , Proj B a nd s, P ro j Ba n d s
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Projection Ba nds
20 period
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Envelope Examples – “Projections Bands”
WM T , Proj B a nd s, P ro j Ba n d s
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Projection Ba nds
30 period
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Envelope Examples – “Standard Error Bands”
- Bands are Standard Error above and below linear regression
- Measures volatility, use with “r-squared” indicator
WA L M A RT S T O RE S (5 5 .0 0 0 0, 5 7 .0 0 00 , 5 4 .6 8 00 , 5 6.4 70 0 , +0.40 0 0 0 )
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Sta nda rd Error Ba nds
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Bollinger Bands
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John Bollinger – Financial News Network, “Market
Technician” in 1980’s
Pioneered use of Standard Deviation for construction
of price envelope in 1983
Bollinger Bands are:
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20 bar moving average,
Upper Band is 2 Standard Deviations above Mov Ave,
Lower Band is 2 Standard Deviations below Mov Ave
Contains 89% of all prices
Shows Volatilitiy
Envelope Examples – “Bollinger Bands”
WAL M ART ST O RES (53.59000, 54.79000, 52.68000, 54.55000, +1.00000)
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Septem ber Novem ber
2 0 0 2 February
Apri l
M ay
June July
AugustSeptem ber
Novem ber
Using Bollinger Bands
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“The Squeeze”
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“Walk the Bands”
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Low volatility followed by break-out, higher volatility
Lower volatility marks end of trend, Opposite Band turns in
at end of trend
Indicates strong trend
pullbacks to Moving Average
Sideways trend
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tag of upper, followed by tag of lower band, and visa versa
If cross Mov Ave, then will continue to Band
Using Bollinger Bands – The Squeeze, Walking
the Bands
IB M (78.9000, 80.5000, 78.3200, 80.4000, +1.46000)
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T he S queeze - narrow bands foll owed
by breakout in m i d-A ugust
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Wal ki ng
the band
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8 15 22 29 6 13 20 28
10 17 24 1
15 22 29 5 12 19 26 3
16 23 30 7 14 21
A pri l
M ay
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A ugust
S eptem ber O ctober
Using Bollinger Bands – Patterns
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Relative “W”, “M” pattern
Becomes - relative
Buy
Band Tag
Using Bollinger Bands – Patterns
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Relative “W”, “M” pattern
Becomes - relative
Band Tag
Sell
Using Bollinger Bands – Use with other
indicators
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Confirm with other indicators
Bollinger Bands are a “price” indicator
Use Volume indicators
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Volume only:
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On Balance Volume
Volume Trend
Volume & Price:
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Demand Index
Money Flow
PriceVolume Trend
Accum Distribution
Intraday Intensity
Chaiken AD Oscillator
Volume Weighted MACD ?
Bollinger Bands – with
Money Flow Index (MFI)
Wal m art (54.4100, 54.9300, 53.3000, 53.4200, -0.98000)
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Declining MFI
confirms downtrend
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MFI
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FebruaryM arch
A pri l
M ay
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Using Bollinger Bands – “Bandwidth,
%b”
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Bandwidth
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Bandwidth formula
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BBandTop(CLOSE, 20, S, 2) – BBandBot(CLOSE, 20, S, 2)
%b
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Measures distance between upper and lower band
Greater distance -> greater volatility, strong trend
Use Bandwith to find “The Squeeze”
Lesser distance -> lesser volatility, sideways
Measures position of price relative to Bottom and Top bands
Range 0 to 1: 0 indicates bottom band tag, 1 indicates top band
tag, .5 indicates in the middle
%b formula
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(CLOSE – BBandBot(CLOSE, 20, S, 2)) / Fml(“BandWidth”)
Using Bollinger Bands – Bandwidth, %b
IBM (78.90000, 80.50000, 78.32000, 80.40000, +1.46000)
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BandWidth
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%b
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N ov em ber D ecem ber 2002
F ebruary March
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Bollinger Bands – Applied to indicators
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Apply Bollinger Bands to MFI, RSI, etc
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Shows Range of Indicator (Standard Deviation)
%b of Indicator
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Shows Relative Highs and Lows of indicator instead of
Fixed Highs and Lows (80/20 Overbought/Oversold)
Bollinger Bands Applied to Indicators
IBM (78.90000, 80.50000, 78.32000, 80.40000, +1.46000)
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MFI
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B Bands on MFI
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B Bands on MFB
I Bands on MF I
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Bollinger Bands - %b Applied to
Indicators
APPLI ED MATER IAL (14.90000, 15.95000, 14.77000, 15.72000, +0.69000)
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RSI
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%bRSI
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Bollinger Band – MetasStock Formulas
Bollinger Band Components
BandWidth1: BBandTop(CLOSE, 20, S, 2) - BBandBot(CLOSE, 20, S, 2)
%b: (CLOSE - BBandBot(CLOSE, 20, S, 2)) / Fml( "BandWidth1")
Bollinger Bands applied to Indicators
Money Flow Index
BandWidthMFI: BBandTop(MFI(14), 20, S, 2) – BBandBot(MFI(14), 20, S, 2)
%bMFI: (MFI(17) – BBandBot(MFI(17), 20, S, 2)) / Fml(“BandWidthMFI”)
Accum/Distribution
BandWidthAD: BBandTop(AD(), 17, S, 2) – BBandBot(AD(), 17, S, 2)
%bAD: (AD() – BBandBot(AD(), 17, S, 2)) / Fml(“BandWidthAD”)
Chaiken AccumDistr Oscillator
BandWidthADO: BBandTop(CO(), 20, S, 2) – BBandBot(CO(), 20, S, 2)
%bADO: (ADO() – BBandBot(ADO(), 20, S, 2)) / Fml(“BandWidthADO”)
Intraday Momentum Index
BandWidthIMI: BBandTop(IMI(17), 17, S, 2) – BBandBot(IMI(17), 17,
S, 2)
%bIMI: (IMI(17) – BBandBot(IMI(17), 17, S, 2)) /
Fml(“BandWidthIMI”)
Volume
BandWidthVol: BBandTop(VOLUME, 27, S, 2) – BBandBot(VOLUME,
27, S, 2)
%bVol: (VOLUME – BBandBot(VOLUME, 27, S, 2)) /
Fml(“BandWidthVol”)
RSI
BandWidthRSI: BBandTop(RSI(CLOSE, 17), 17, S, 2) –
BBandBot(RSI(CLOSE, 17), S, 2)
%bRSI: (RSI(CLOSE,17) – BBandBot(RSI, 17) 17, S, 2)) /
Fml(“BandWidthRSI”)
Generic BandWidth and %b
BandWidth_20: BBandTop(p, 20, S, 2) – BBandBot(p, 20, S, 2)
%b_20: (p – BBandBot(p, 20, S, 2)) / Fml(“BandWidth_20”)
Bollinger Bands - Summary
•Provide Envelope for most of price action
•Shows Volatility
•“The Squeeze” – sharp moves occur after Squeeze
•“Walking the Bands” – move outside band, continue
trend
•“M” and “W” Patterns – convert to Relative M, W,
trend change
•A move that originates at one band goes to the
other band
•A cross of Moving Avg continues to next band
•Confirm with other indicators (Volume indicators)
•Apply Bollinger Bands to other indicators
Bollinger Bands – Bibliography
•“Bollinger on Bollinger Bands”, John Bollinger
•“Technical Analysis of the Financial Markets”, John Murphy
•“Getting Started in Technical Analysis”, Jack Schwager
•“Technical Analysis for the Trading Professional”, Constance
Brown
•“Technical Analysis from A to Z”, Steven Achelis