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It seems like after you read many of the general classics in trading and in your specialized market of choice, there doesn’t seem to be much new under the sun. It’s rare to come across a book that you absolutely must add to your collection, but Bollinger on Bollinger Bands (McGraw Hill) by none other than John Bollinger himself, falls
into that list of books you should buy because you will reference it in the future. It didn’t hurt that I was a big fan of the bollinger band as an indicator, as it’s standard on all of my charts and I wanted to see if there was anything else I could learn about this indicator that could help my own trading. The elegance of this book as well as the indicator itself, lies in it’s simplicity that “allow traders to understand the degree & speed which markets can move”, which is another way to look at volatility. After reading B on B, I have a new-found appreciation for volatility and any book that can get me to look at the markets in a new light, is one that I can recommend without hesitation.

In the event that you aren’t familiar with Bollinger Bands, the working definition for most standard chart packages would be a volatility indicator that follows the price 2 standard deviations above and below the actual price with a 20 period moving average separating the bands themselves. John Bollinger stated that “volatility is cyclical even when price is not” which is such an important concept to understand when trying to predict future price moment.

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With a definition and a picture to work with, here are some key characteristics and information that Bollinger Bands can provide for all traders:

  • Define key parameters that accompany market gyrations.
  • Set the boundary for expectations.
  • Bend, yet they are made to be broken to highlight volatility.
  • Accentuate important information when they are broken.
  • Clarify the patterns seen on the charts.

This book is broken up into 3 sections with the first being some historical information about John Bollinger and how this indicator came to be. One could literally skip over this part as the author suggests this himself, if you want to get right into the heart of the matter, but I chose to read everything. He then moves into how to utilize this indicator to identify what he calls W-Type Bottoms and M-Type Tops. Finally in the last section, he demonstrates how to make this indicator even more powerful by using it in conjunction with a few other indicators to create strategies to trade with.

One of the more important concepts the author stresses is that many traders use the bollinger bands incorrectly. They believe it to give an indication of a top when the chart touches the upper bollinger band and an indication of a bottom when it tags the bottom. While this is the case in some instances, more than not a breach of the upper or lower is a sign of a continuation move, not a reversal. This is a very significant paradigm shift in one’s use of this indicator, because instead of selling at a time when a trader believes a top to be in, they can hold their position for even greater gains.

“While there is some evidence of regression to the mean, it is not as strong as it should be, so tags of the bands are not automatic buys or sells with the average as a target.” ~John Bollinger

One way to tell whether a tag of the upper bollinger band is a top or a continuation is to use an additional indicator. This will help keep us rational and leave less up to emotional guesswork (fear and greed). When your chosen indicator confirms a tag of the bands, you then have a continuation signal and if it doesn’t, then expect the stock to reverse with the first target being the middle of the bands (20 day moving average).

One of my favorite sections is where he gives you three very specific strategies that you can use on their own, or customize them in some way to make them unique. I always like it when authors give you real, in the market, trading ideas that allow you to use your creative powers to come up with other ways to utilize these strategies. Two indicators that I came away with a much better understanding of how they work are the BB % Indicator and BB Width. Sometimes we avoid indicators because we don’t know how they really work or the mathematics behind them. The author stresses the importance of really understand what a indicator is designed for so we know what to expect from it.

Bollinger on Bollinger Bands is a relatively easy read with a review at the end of each chapter, but the information contained inside this book will thoroughly enlighten you to the power of this often misused indicator. Before I knew it I was halfway through the book with a number of enlightening notes that I plan on referencing time and time again to keep the author’s insights fresh in my mind. With a historical perspective and functionality tips, you’ll be well on your way to mastering bollinger bands and your trading will thank you for it.