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John Bollinger: The Key To Using Bollinger Bands
Aspire, Thought Leaders | 16 January 2015
By: Simeon Ang
Articles (125) Profile

In the run up to his key note session at the Market Outlook and Technical Analysis 2015, I managed to have a short chat with the creator of the Bollinger Bands, John Bollinger.

We talked quite a bit about the Bollinger Bands and how investors and traders should use it as a means to find setups. For the uninitiated, below is what John mentioned about the Bollinger bands specifically. Do note that the transcript was edited for clarity purposes.

Bollinger Bands – What Are They?
John Bollinger: Bollinger bands are curves that are drawn in and around the price structure that define on a relative basis whether the prices are relatively high or relatively low. This is information that traders can use to create trading systems and help them make trading decisions.

An example of Bollinger Bands

The base of the bands is moving average, typically a 20 period moving average and then the line above the moving average is spread above the moving average by a measure of volatility. And the line below the moving average is spread below the moving average again by that same measure of volatility.

The Key To Using Bollinger Bands
John Bollinger: The key to the success of Bollinger bands is that the use of volatility, so when the markets very quiet, the bands will be quite tied to price. And when the market is very volatile, they will be much wider.

So, what that means is that, the definition of relatively high and low adapts to the price structure as it evolves.

A typical example of this might be trying to trade something like a double bottom in a stock, where the stocks comes down and makes a low and then bounces and comes back and makes a second low.

We can measure those lows instead of in relations to one another, we can measure them in relations to the Bollinger bands and then use that information to create a trading system to trade that sorts of formation.

Bollinger’s Impetus For Creating Bollinger Bands
John Bollinger: The impetus for me to create Bollinger bands was pretty straight forward. I had a trading system which use fixed width trading bands. These were bands that were fixed above and below moving average by a percentage of the value of the moving average.

Say, the moving average plus 5 percent to the moving average less 5 percent. And the problem was that you have to adapt those bands all the time, you might have to widen them as market started trending upwards or narrow them as market started to consolidate.

And when you did that, you let your emotions into the trading process. If you are bullish, you painted the bullish picture and if you are bearish, you painted a bearish picture.

I didn’t want to do that, I wanted an adapted set of trading bands that were driven by market actions. At that time, I was an option trader, so I was very concerned with volatility and studying volatility.

One day I realised that maybe I could use volatility to set the width of the bands and that turn out to be the right answer. And after a little bit of experimentation, trial and error, I came up with a formulation for Bollinger bands.

Do note though, Bollinger Bands are usually used together with other technical indicators. Hence, further analysis and adaptation (to your trading habits) may be required. John Bollinger will be speaking at the Market Outlook and Technical Analysis 2015. For more details head over here!

Transcript of interview was done by Tang Tian Xi

Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.


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