*Bollinger suggests increasing the standard deviation multiplier to 2.1 for a 50-period SMA and decreasing the standard deviation multiplier to 1.9 for a 10-period SMA.
n its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal; the first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal.
irst, notice that this is a strong surge that broke above two resistance levels. A strong upward thrust is a sign of strength, not weakness. Trading turned flat in August and the 20-day SMA moved sideways. The Bollinger Bands narrowed, but APD did not close below the lower band. Prices and the 20-day SMA turned up in September. Overall, APD closed above the upper band at least five times over a four-month period. The indicator window shows the 10-period Commodity Channel Index (CCI). Dips below -100 are deemed oversold and moves back above -100 signal the start of an oversold bounce (green dotted line). The upper band tag and breakout started the uptrend. CCI then identified tradable pullbacks with dips below -100. This is an example of combining Bollinger Bands with a momentum oscillator for trading signals.
Signal: W-Bottoms
W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms, which form in a downtrends and contain two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band. Second, there is a bounce towards the middle band. Third, there is a new price low in the security. This low holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break.
Signal: M-Tops
n its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal; the first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal.
Signal: Walking the Bands
Moves above or below the bands are not signals per se. As Bollinger puts it, moves that touch or exceed the bands are not signals, but rather “tags”. prices can “walk the band” with numerous touches during a strong uptrend. Think about it for a moment. The upper band is 2 standard deviations above the 20-period simple moving average. It takes a pretty strong price move to exceed this upper band. An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend. The 20-day SMA sometimes acts as support. In fact, dips below the 20-day SMA sometimes provide buying opportunities before the next tag of the upper band.irst, notice that this is a strong surge that broke above two resistance levels. A strong upward thrust is a sign of strength, not weakness. Trading turned flat in August and the 20-day SMA moved sideways. The Bollinger Bands narrowed, but APD did not close below the lower band. Prices and the 20-day SMA turned up in September. Overall, APD closed above the upper band at least five times over a four-month period. The indicator window shows the 10-period Commodity Channel Index (CCI). Dips below -100 are deemed oversold and moves back above -100 signal the start of an oversold bounce (green dotted line). The upper band tag and breakout started the uptrend. CCI then identified tradable pullbacks with dips below -100. This is an example of combining Bollinger Bands with a momentum oscillator for trading signals.
Conclusion
Bollinger Bands reflect direction with the 20-period SMA and volatility with the upper/lower bands. As such, they can be used to determine if prices are relatively high or low. According to Bollinger, the bands should contain 88-89% of price action, which makes a move outside the bands significant. Technically, prices are relatively high when above the upper band and relatively low when below the lower band. However, “relatively high” should not be regarded as bearish or as a sell signal. Likewise, “relatively low” should not be considered bullish or as a buy signal. Prices are high or low for a reason. As with other indicators, Bollinger Bands are not meant to be used as a stand-alone tool. Chartists should combine Bollinger Bands with basic trend analysis and other indicators for confirmation.
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