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I looked through several sources on Bollinger bands and I do not see clear recipes of their usage. Wikipedia says "The use of Bollinger Bands varies widely among traders. " QSE discussion seems also says "Just like everyone else that's been down this path, you'll have to prove this stuff to yourself. "

Question Would you be so kind to share with me your experience - how (and when) do you use them ? what are the outcomes? and what idea stands behind it ?


Let me say what I understand - if market is in horizontal trend, i.e. we can think of it as price = Const + noise. Then it is reasonable to expect that if in some moment price is quite big, then it it will return to mean - so we go short at big price and sell in future, when it returns to trend(=Const).

However if we have positive trend: price(t) = A*t+B + noise, it very much depends on how fast noise is changing, how big is A, and volatility of noise. Since if trend is go ups very quickly even if the price is far from trend and it will return to trend some time after at the moment of return it will be much high than it was before (because of trend), so if you go short - you will lose.

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Bollinger bands (aka standard deviation envelopes) are most often used in non-proprietary indicators by data vendors, including Bloomberg. There is no edge in using them as all they do is measure historical realized price variation off a defined mean. –  Matt Wolf Jun 5 '13 at 4:49
    
I think the "prove this stuff to yourself" comment is actually good advice. There's a nice example of Bollinger bands implemented on Quantopian. You can clone the sample code and backtest whatever variants come to mind. –  Dan Dunn Jun 5 '13 at 22:19
    
I have lost quite a fair amount of money in my formative days trading based on Bollinger bands alone: momentum or mean reversion strategies. What I have learnt is that these lines are all just that - lines in the sand. Not much edge there for me. –  mrkre Jun 11 '13 at 3:33
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3 Answers

I have played around with those a bit and my results were mixed. Bollinger bands essentially show you the price relative to rolling window volatility.

One interpretation is that if the current price leaves the Bollinger bands, a trend or movement emerges (of course depending on your time frame as with all technical indicators) in that direction. The strategy would be to buy as soon as the upper band is crossed from below, and close the position as soon as the price crosses the moving average with the same length as the bands. Intuitively, trade when the price is farther away from the moving average than a multiple of standard deviation (larger multiple => less trades, possibly stronger moves). On multiple day frames (between 4 and 60, iirc), this did yield nice results on stocks (in mock portfolios), but I assume that is mostly due to backtesting bias. Nothing consistent or reliable that I found worthy of exploring given the pressure of actual work. Maybe in the future though...

Another interpretation could be to trade the other way: As the price leaves the band, it should soon re-enter it. However I could not come up with a tradingstrategy that even remotely made sense to me, so I didn't explore this.

The most likely use in practice I would assume to be somewhere in the area of a short- to midterm indicator for equity risk, but I would prefer true econometric methods to be honest.

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Thank you very much! –  Alexander Chervov Jun 5 '13 at 8:12
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John Bollinger, the developer of Bollinger Bands, provides descriptions of methods he suggests for using his bands on his website BBands.com. They can be found under Four Methods in the support area. Bollinger Bands are most effective when used with other indicators for confirmation, and are very powerful for mean reversion and for price breakouts. On the home page of BBands.com there is a free webinar with 22 rules for using the bands that provides a lot of guidance for usage.

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Usage of Bollinger Bands as a volatility indicator is a strange practice. Because it's calculation is based on asset volatility instead returns volatility. So any great trend piece will be contain more wider Bollinger Bands channel, than simple flat fluffy piece, where deviation realy is there.

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