Bollinger Bands are a technical trading tool that can be applied in all financial markets, including equities, forex, commodities and futures. In this article, John Bollinger provides his own insight into Bollinger Bands, their lasting relevancy and their application in the current retail trading industry.
John Bollinger’s main talking points:
- An introduction to Bollinger Bands
- Key tools for forex traders
- A surprising discovery: Using Bollinger Bands to find new opportunities
- Why are Bollinger Bands more popular than ever?
- Enduring power and relevance
Introduction to Bollinger Bands
Bollinger Bands can be applied across all financial markets and used in most timeframes, from very short-term periods to hourly, daily, weekly or monthly. The only requirement is that there be sufficient liquidity to see the price-formation mechanism at work in each bar. While broadly applicable, Bollinger Bands are particularly effective in forex trading.
Read our complete guide to Bollinger Bands® and forex.
Why are Bollinger Bands and forex such a good combo? Because forex is a form of pairs trading, each transaction involving a long position in one currency and a short position in another. For example, ‘cable’ involves being long the British pound and short the US dollar. These days cable is more often known by its symbol, GBP/USD.
All pairs exhibit a statistical property known as stationarity that is central to the concept of standard deviation, the motive force behind Bollinger Bands. See the GBP/USD chart below for an example.
Surprising discovery: Using Bollinger Bands to find new opportunities
Years ago, a couple of traders approached me at an MTA seminar and told me how effective my tools were in their work. When I asked what they traded, they said stock pairs. They were using Bollinger Bands to identify when regularly occurring relationships deviated from thenorm, with the objective of profiting when they ‘reverted to the mean’.
This encounter spurred some research on my part, and it turned out that the traders were correct: Bollinger Bandsare quite effective in identifying pairs opportunities. I concluded that this was primarily true because pairs exhibited stationarity. What is stationarity? In statistics it is where a time series is centered around some core value over the long haul.
Individual stocks do not exhibit stationarity – they can run to untold heights or crash to zero – but it is generally true that stock pairs are stationary. It is more often than not true about commodities, where production costs tend to anchor prices over time – another area where Bollinger Bands are quite popular.
In the succeeding years I have observed time and again that, using nothing more than Bollinger Bands, %b, and BandWidth, forex traders have been able to make good market calls, which has been an interesting and satisfying demonstration of the power of these tools.
Why are Bollinger Bands more popular than ever?
Forex and Bollinger Bands have continued to increase in popularity, as many of the other tradable asset classes have become ever more correlated over the years. Many individual traders and portfolio managers have turned to forex as an attractive option for diversification. Tools like Bollinger Bands, which help assess relative price action, can be a powerful option for volatile asset classes like forex.
Enduring power and relevance
One interesting aspect of Bollinger Bands is that virtually none of the forecasting power of Bollinger Bands and the related tools has been diluted over the years, despite dire warnings that such power was either illusory or would be arbitraged away. How can that be? Aren’t Bollinger Bands extremely popular today? Doesn’t that mean they shouldn’t work anymore?
The prime reason that they still work is that Bollinger Bands are built upon first principles ideas that have and will remain at the core of the markets, for forex and beyond. A second important reason is that Bollinger Bands are tools, not systems. That means that they are not used in a monolithic manner; rather they are used in all sorts of different strategies which are constantly evolving along with the markets.
About John Bollinger
John Bollinger, CFA, CMT, is the president and founder of Bollinger Capital Management, Inc., an investment management company that provides technically driven money management services for individuals and institutions.
He is best known for developing Bollinger Bands®. Traders and investors worldwide use Bollinger Bands to assess expected price action in the financial markets, and the bands are featured on most financial charting software and websites. His book Bollinger on Bollinger Bands has been translated into twelve languages.
Mr. Bollinger is the recipient of the Technical Securities Analysts Association of San Francisco Lifetime Award for Outstanding Achievement in Technical Analysis, the 2005 CMT Association Annual Award for Outstanding Contribution to the Field of Technical Analysis and the IFTA 2015 Lifetime Achievement Award.
www.BollingerBands.com provides educational materials regarding Bollinger Bands.