John Bollinger, an American analyst and trader, gained widespread recognition for developing a series of indicators, with Bollinger Bands taking a leading position among them. This indicator is widely used by traders across the globe to analyse market volatility. It is also integrated into the MetaTrader 4 and MetaTrader 5 trading platforms, making it readily available for quick and effective use in trading various instruments across different time frames.
Bollinger Bands: The History of Their Creation
John Bollinger was born in 1950 in the United States. He developed an interest in finance at a young age, and after completing his education, he began his career as a financial market analyst. It was this profession that led Bollinger in the early 1980s to start working on his now-famous indicator. It is worth noting that John always had a keen interest in new approaches to data analysis. Developing his own indicator allowed him not only to enhance his own trading strategies but also to make a significant contribution to the theory and practice of technical analysis.
As a young analyst, Bollinger recognised that volatility is a key but often overlooked aspect of financial markets that can significantly impact trading strategies. However, there were no truly effective methods for measuring this parameter at that time, prompting Bollinger to seek a solution to this problem. Many existing analytical tools were rigidly configured and did not adapt to changes in market volatility. Therefore, there was a need to develop an indicator that could adapt to market changes and provide traders with a flexible yet powerful analytical tool.
As a result, John utilised the concept of standard deviation to create an indicator that not only tracks trends but also dynamically responds to changes in volatility by automatically adjusting its boundaries. The outcome of this work was the creation of Bollinger Bands, a tool that has become one of the most popular in technical analysis.
Bollinger himself eventually became one of the leading experts in this field, with his opinions and methods resonating with both professionals and novice participants in financial markets for many years. He also authored the book "Bollinger on Bollinger Bands," which is one of the authoritative guides on applying his indicator. In addition, John Bollinger developed several other trading systems and indicators that contribute to a better understanding of market dynamics and risk management, which is especially crucial in rapidly changing market conditions.
Bollinger Bands: Principles of Operation
As previously mentioned, the Bollinger Bands indicator is one of the key tools in technical analysis, used to assess market volatility and identify potential price reversal points. The indicator is adaptive, making it widely applicable across various market conditions and timeframes. It consists of three main lines that form "bands" around the price chart of an asset. Here’s how each of these lines and the indicator itself work:
1. The Middle Line represents a simple moving average (SMA), typically calculated over the last 20 periods. This line serves as the basis for calculating the upper and lower bands and represents the underlying trend of the asset's price.
2. The Upper Band is positioned above the middle line and is calculated by adding a value equal to two standard deviations of the asset's price over the same period to the middle line. The standard deviation is a measure of volatility, so the upper band adjusts to changes in market volatility: it expands (moves away from the middle line) when volatility increases and contracts (moves closer to the middle line) when volatility decreases.
3. The Lower Band is positioned below the middle line and is calculated by subtracting a value equal to two standard deviations over the same period from the middle line. Like the upper band, the lower band adjusts to changes in volatility.
In summary, there are three main principles of trading using Bollinger Bands:
1. Band Squeeze: When the bands contract, it indicates a decrease in volatility and may signal a potential price breakout.
2. Band Expansion: Indicates an increase in volatility and can be associated with significant price movements.
3. Trading on Bounces: If prices reach the upper band and bounce downward, it could serve as a sell signal. Conversely, if prices touch the lower band and bounce upward, it may be a buy signal.
Other Works by Bollinger
John Bollinger, not limiting himself to the invention of his famous Bands, also made significant contributions to the development of a number of other innovative tools and theories in the field of technical analysis. Here are just a few of them:
1. Bollinger Bandwidth – This is a derivative indicator that measures the width of the Bollinger Bands, helping to determine the level of market volatility. Similar to the "parent" indicator, an increase in width indicates rising volatility, while a decrease suggests diminishing volatility.
2. Percent B Indicator (%B) shows the position of the asset's price relative to the Bollinger Bands. A %B value of 1 indicates that the price is at the upper band, a value of 0 signifies the price is at the lower band, and a value of 0.5 indicates the price is exactly on the middle line of the bands. This indicator is used to identify overbought or oversold conditions of an asset.
3. Bollinger Bars are a modification of standard price charts, where the width of the bars changes depending on volatility. The higher the volatility, the wider the bar, and vice versa. This visual representation helps traders better assess market dynamics.
4. Ice Breaker System – This is a trading system developed by Bollinger, designed to identify and exploit short-term trends. It includes a set of entry and exit rules based on the Bollinger Bands and %B indicators.
5. Capital Growth Theory – A concept developed by Bollinger aimed at maximizing profits and minimizing risks through adaptive management of trade position sizes depending on market volatility.
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John Bollinger's ideas have not only helped traders avoid many market "traps," but they have also added a refreshing sharpness and novelty to the analytical routine. The tools and methods he developed enable traders not only to accurately analyse current market conditions but also to craft comprehensive trading strategies.
As Markets Menson admitted, "Bollinger Bands have become such a fundamental part of my trading toolkit that I feel somewhat blind without them." According to Linda Bradford Raschke, one of the most renowned women in the field of futures trading and an author of books on trading strategies, "John Bollinger’s contributions to trading are profound. The bands are not just a tool but have helped us understand the nature of volatility."
