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Chapter 12, Part I. Bollinger Bands. Page 5

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 19, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Application of the Bollinger Bands Indicator

    The BB indicator could be applied in some ways:

    1. Estimation of market volatility. In general, when the market is calm and quiet – volatility decreases, hence deviation of price from its average also becomes less, and…?

    Pipruit: (*we use 2 or 3 deviations…each deviation becomes smaller…*)… and the range between bands becomes tighter.
    Commander in Pips: You’re right. Well done. At the same reasoning the distance between bands becomes greater, when the market turns in sloppy price action or in an impulse and thrusting move.
    Here is how it looks like:


    Chart #1 | AUD/USD Weekly, 20-period/2-deviations Bollinger Bands
    [​IMG]

    Commander in Pips: Here you can see – when the market was calm – the distance between the lines was tighter. In 2007 market fluctuations became wider, hence, volatility was increased and the distance between BB bands then expanded. During the collapse in 2008, the market was really loud – the bands’ distance has become really wide.

    Pipruit: Looks nice, but still, the market has pierced its lines …
    Commander in Pips: Yes, partially it because of just 2 deviations application. Look, how it will be, if we apply 3 deviations:


    Chart #2 | AUD/USD Weekly, 20-period/3-deviations Bollinger Bands
    [​IMG]
    Pipruit: Oh, much better, you were right, Sir.
    Commander in Pips: I even have had to eliminate some points, where market previously touched the bands. And here we get the second application way of Bollinger Bands – classic BB Bounce.

    2. Classic bounce from Bollinger Bands lines

    As we’ve noted already, due to math laws, price tends to return to the middle of the bands. According to normal distribution, when price reaches any of the bands – it becomes stretched, like a spring and tends to move right back. So, the bands of BB indicator acts like support and resistance:


    Chart #3 | AUD/USD Weekly, 20-period/3-deviations Bollinger Bands
    [​IMG]

    The longer the time frame is, the stronger these bands are. It’s a long time already the classic trading strategy exists, that based on application of BB Indicator, when market does not show real trend, or when this trend develops very smooth, without solid splashes. Other words – when volatility is constant or decreasing.

    But the Bollinger Bands Indicator could be applied, when market does have a trend:
     
    #1 Sive Morten, Dec 19, 2013
    Lasted edited by : Mar 15, 2016
    Hamza Samiullah and fran alvarez like this.
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