THE BOLLINGER TRADER

First, an explanation of BB if you didn't already know.

BB: Bollinger Bands

Overview
Bollinger Bands are due to John Bollinger, and consist of three curves:

1. a simple moving average in middle
2. an upper band corresponding to a simple moving average plus a constant, k, times the standard deviations
3. a lower band corresponding to a simple moving average minus a constant, k, times the standard deviations.


The latter two curves are symmetrical and form an envelope around the first curve.

Calculation
Creating Bollinger Bands involves four steps:

1. calculate the simple moving average, using n as a parameter specifying the number of periods to include
2. calculate the standard deviation of the mid-prices over the last n periods. See the section on Standard Deviation on how to calculate it.
3. calculate the upper band as:
           UB(t) = SMAn(t) + m * STDDEVn(t)
   where SMAn(t) is the Simple Moving Average over n periods at time t,
   STDDEVn(t) is the Standard Deviation of the mid-prices over the last n periods, and
   m is a second parameter.
4. calculate the lower band as:
           LB(t) = SMAn(t) - m * STDDEVn(t)
   where SMAn(t) is the Simple Moving Average over n periods at time t,
   STDDEVn(t) is the Standard Deviation of the mid-prices over the last n periods, and
   m is a second parameter.


Parameters
Bollinger Bands entail two parameters:

• n: the number of periods used in calculating the Simple Moving Average and the Standard Deviation
• m: a multiplicative factor specifying how tight the bounds should be made around the Simple Moving Average.
Typical values for n are 14 or 20, and in that case m is often set to 2. For higher values of n (such as 50 or 90), m is typically set to a higher value, such as 2.5 or 3.

Interpretation
Because standard deviation measures volatility, the bands widen when the currency prices are volatile and they are tight when there is not much volatility. Some argue that changes in the trend change significantly when the bands are tight; i.e. when volatility is low. Bollinger bands give a reference point as to what is currently considered to be high or low. When  currency prices go over the band, they would be considered relatively high, and conversely, when the prices go below the band, they are considered relatively low.  Bollinger Bands are not typically used to generate signals themselves; rather, they are typically used together with, and as support for, other indicators.

The bollinger band is simply a statistical average. When ticking 'outside' of the bands, an opposite tick is a buy/sell signal. See below.

Note how the red bars are down and down. The second green bar which touches the inside of the band area is your buy signal. Look how high the upper band is at the time of that signal. That is the statistical area where the market can go.

.: BOLLINGER SHOULD BE SET TO PERIOD 14 AND 3 STANDARD DEVIATIONS

.: Do not, do not, do NOT try to pick a bottom or top. Wait for a reversal. This will cost you 2 or 3 points but will ensure the strategy works

.: Always trade the opposite side when the bands are widest

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