Bollinger Tells the Story

Jordan Craw

Bollinger Bands are an indicator that I have discussed in previous articles in Trading Tutors, such as Trading Tutors Issue #76: 24 Sept 2004. They are an indicator I like to use as a back up or additional test. There are some great set-ups currently coming together using both Gann and Elliott techniques that will no doubt be covered in the coming weeks.

Probably one of the most simple measures of the near term future for some of the major indices is the Bollinger Band. Essentially Bollingers create a standard deviation channel around the price action based on a moving average. Personally I like to use the standard 20 period moving average or a 13 period moving average. The 13 period is especially useful for anyone working off intra day charts.

In previous articles I have spoken about the angle of the Bollinger Band upper and lower limits as an indication of trend direction and strength. Today I want to focus on another form reading aspect. When the price action breaches the band limits to an extent that more than 50% of the price action is outside them, a change in trend is likely.

Let's take a look at three major Indices - the SPI 200 in Australia, The S&P500 from the US and the FTSE from the UK. These markets are closely related and this becomes more evident in significant moves like the recent pullback. Note how far the price action has extended beyond the lower limit on all three indices.

click chart for more detail

click chart for more detail

click chart for more detail

Now, if you have the means, take a look back at when the bands are breached by a significant portion of the day's price action and the reaction that occurs in a high majority of cases. Many times the price action goes on to touch the opposite band (in this case the upper), but almost always returns to the mid-line.

One tip I always find useful is to use candlestick charts with Bollinger Bands as they often provide a clearer picture of the day's price action body. At the time of writing, on Wednesday 20 th April, this gives some good near term price targets for the major indices that drive stock movement.

Happy Trading

Jordan Craw