following are a few rules that serve as a good Beginning point.
1. Bollinger bands provide a relative definition of high and low.
2. That relative definition can be used to compare price action and indicator action to arrive at
Rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest,
Inter-market data, etc.
4. Volatility and trend have already been deployed in the construction of bollinger bands, so
Their use for confirmation of price action is not recommended.
5. The indicators used should not be directly related to one another. For example, you might use
One momentum indicator and one volume indicator successfully.
6. Bollinger bands can also be used to clarify pure price patterns such as “m” tops and “w”
Bottoms, momentum shifts, etc.
7. Price can, and does, walk up the upper bollinger band and down the lower bollinger band.
8. Closes outside the bollinger bands are continuation signals, not reversal signals. (this has
Been the basis for many successful volatility breakout systems.)
9. The default parameters of 20 periods for the moving average and standard deviation
Calculations, and two standard deviations for the bandwidth may be varied for the market.
10. The average deployed should not be the best one for crossovers. Rather, it should be
Descriptive of the intermediate-term trend.
11. If the average is lengthened the number of standard deviations needs to be increased
Simultaneously; from 2 at 20 periods, to 2.5 at 50 periods. If the average is shortened the
Number of standard deviations should be reduced; from 2 at 20 periods, to 1.5 at 10 periods.
12. Bollinger bands are based upon a simple moving average. This is because a simple moving
Average is used in the standard deviation calculation and we wish to be logically consistent.
13. Make no statistical assumptions based on the use of the standard deviation calculation in the
Construction of the bands. The sample size in most deployments of bollinger bands is simply
Too small for statistical significance.
14. Finally, tags of the bands are just that, tags not signals. Touching the upper band is not in-
And-of-itself a sell signal and touching the lower band is not in-and-of-itself a buy signal.