What if the candlestick preceeding 1 was also outside the BB range? HeikinAshi thank you for this very interesting indicator Nicolas! Technical Securities Analysts Association . Find entry or exit signals or develop a complete system based on average true range. It means the related party is controlling the market strongly.
BREAKING DOWN 'Bollinger 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. Overall, APD closed above the upper band at least five times over a four month period. Dips below are deemed oversold and moves back above signal the start of an oversold bounce green dotted line. The upper band tag and breakout started the uptrend. We'll use the term trading bands to refer to any set of curves that market technicians use to define high or low on a relative basis. The earliest example of trading bands that I have been able to uncover comes from Wilfrid Ledoux in He used curves connecting the monthly highs and lows of the Dow Jones Industrial Average as a long-term market-timing tool.
After Ledoux the exact sequence of trading band development gets foggy. In Chester Keltner proposed a trading system, The Day Moving Average Rule, which later became Keltner bands in the hands of market technicians whose names we do not know. Next comes the work of J. Hurst who used cycles to draw envelopes around the price structure. Hurst's work was so elegant that it became a sort of grail with many trying to replicate it, but few succeeding.
In the early '70s percentage bands became very popular, though we have no idea who created them. They were simply a moving average shifted up and down by a user-specified percent. Percentage bands had the decided advantage of being easy to deploy by hand. Arthur Merrill suggested multiply and dividing by one plus the desired percentage. When I started using trading bands percentage bands were the most popular bands by far.
Along the way we got another fine example of envelopes, Donchian bands, which consist of the highest high and lowest low of the immediately prior n-days. Over the years there have been many variations on those ideas, some of which are still in use.
Today the most popular approaches to trading bands are Donchian, Keltner, Percentage and, of course, Bollinger Bands. Percentage bands are fixed, they do not adapt to changing market conditions; Donchian bands use recent highs and lows and Keltner bands use Average True Range as adaptive mechanisms. Bollinger Bands use standard deviation to adapt to changing market conditions and thereby hangs a tale.
Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. When the bands lie close together, a period of low volatility is indicated. Traders are often inclined to use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline.
If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. In , Lento et al. The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets.
Similar results were found in another study, which concluded that Bollinger Band trading strategies may be effective in the Chinese marketplace, stating: A recent study examined the application of Bollinger Band trading strategies combined with the ADX for Equity Market indices with similar results. A paper from uses Bollinger Bands to reduce variance in a Monte Carlo simulation used to forecast the Canadian treasury bill yield curve. In , Butler et al.
Their results indicated that by tuning the parameters to a particular asset for a particular market environment, the out-of-sample trading signals were improved compared to the default parameters. Companies like Forbes suggest that the use of Bollinger Bands is a simple and often an effective strategy but stop-loss orders should be used to mitigate losses from market pressure.
Security price returns have no known statistical distribution , normal or otherwise; they are known to have fat tails , compared to a normal distribution. Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices. Just the opposite is true; it is well recognized by practitioners that such price series are very commonly serially correlated [ citation needed ] —that is, each price will be closely related to its ancestor "most of the time".
Adjusting for serial correlation is the purpose of moving standard deviations , which use deviations from the moving average , but the possibility remains of high order price autocorrelation not accounted for by simple differencing from the moving average. For such reasons, it is incorrect to assume that the long-term percentage of the data that will be observed in the future outside the Bollinger Bands range will always be constrained to a certain amount.