Jul 23 2009
Looking at Bollinger Bands In Only One Way
The subject of Bollinger Bands was discussed recently on the VIX and More blog. I’ve employed the Bands for many years now, but not in what a lot of folks would call the classic way. I did research on volatility back in college with Bollinger Bands as the focal point and later published my first ever magazine article in Technical Analysis of Stocks & Commodities. I’ve done my fair share of testing with different ways of employing the Bands, but in the end I settled into using it to help me identify markets readying to make a move into a new trend.
One of the things mentioned by the Vix and More post is the idea of the Bollinger Bands supposedly containing 95% of the price action based on using a 2 standard deviation setting. John Bollinger himself has apparently indicated it’s more like 89% from is own research. My thinking is that a lack of understanding of the statistics of price action keeps people caught up in these figures.
Academics will generally tell you that it’s returns rather than prices which approximate a normal distribution (but as noted by V&M and others do not match it because of the fat tails). Regardless, the look-back period of the Bands don’t really include enough data to really draw much in the way of conclusions in any case. That’s why I’ve never really put much weight on where prices are relative to the Bands. I just use their width as a visual look at historical volatility.
Here are some other posts which might interest you:
