Applying the Bollinger Bands Toolkit
The Basic Suite of Bollinger Band Tools
The Four systems included in the BBTK
Normalized Momentum Indicators
Normalized Trend Indicators
Normalized Volume Indicators
The BBTK Template
Bollinger Bands are bands drawn in and around the price structure on a chart. Their purpose is to provide relative definitions of high and low; prices near the upper band are high, prices near the lower band are low. The base of the bands is a moving average that is descriptive of the intermediate-term trend. This average is known as the middle band and its default length is 20 periods. The width of the bands is determined by a measure of volatility called standard deviation. The data for the volatility calculation is the same data that was used for the moving average. The upper and lower bands are drawn at a default distance of two standard deviations from the average. You can plot all three together (BBands) or each individually (BBUpper, BBMiddle and BBLower.)
Depicts the location of the most recent close within the Bollinger Bands, 1.0 at the upper band, 0.5 at the middle band and 0.0 at the lower band.
AutoWidth Bollinger Bands, AutoWidth %b and AutoWidth BandWidth
Algorithmically adjust the width of the Bollinger Bands to best fit the calculation period chosen by the user. See Chapter 7 of Bollinger on Bollinger Bands These formulations use the same algorithm to set the BandWidth and %b, which allows for direct comparability for any calculation length.
An indicator that depicts the width of the bands. Useful in identifying the Squeeze and the Bulge. Includes reference lines that depict the highest and lowest bandwidth in the past n periods, the default is 125 periods.
Indicators based on the Bollinger Bands
Highlights possible inflection points where we have had a close outside a Bollinger Band followed by a close inside the same band. Plus one for an entry from below, minus one for an entry from above.
Inside the bands last period, outside this period. Plus one for a break of the upper band, minus one for a break of the lower band.
This indicator highlights extremes in BandWidth. A Squeeze is a 125-period trough in BandWidth and marks an area of high potential for a new trend to begin. The Bulge is a 125-period peak in BandWidth and generally marks the end of a trend
Most of the BBTK volume indicators are presented in both open and closed form. The open forms are unbounded lines formed by accumulating the periodic values of the indicators. The closed forms, also known as oscillators, are formed by keeping a fixed-length total of the periodic readings. The open forms are generally plotted with price, while the closed forms are usually plotted on a separate graph section.
In the BBTK the volume oscillators are normalized where possible. See Chapter 18 of Bollinger on Bollinger Bands.
Accumulation Distribution (AD + AD%)
Portrays supply/demand as a function of the relationship of the open and close to the periodic range. Useful for diagnosing potential changes in trend. One way to think about AD is that it is a mathematical quantification of a Japanese Candlestick in relation to volume.
Intraday Intensity (II + II%)
Volume indicator that depicts the flow of funds for a security based on where it closes in its range. It is designed to track the operations of institutional investors that can move markets.
MFI compares volume on up days to volume on down days in a manner similar to RSI. The typical price price (high + low + close)/3 is used to determine up from down. Closed form only.
Negative Volume Index (NVI)
Emphasis on price action on days when volume rises. Open form only.
Normalized volume is volume divided by an average. This plot has two main uses. It allows you to judge whether volume is high or low on a relative basis and it allows the comparison of volume levels from issue to issue. See Chapter 2 of Bollinger on Bollinger Bands. We also present a version in which the square root of volume is used as the base of the calculation, which is useful when there are extremes in volume and in some applications this can make volume analysis easier and volume patterns clearer.
OBV adds volume to a running sum when price advances subtracts volume from the running sum when price declines. It is meant to model the basic forces that drive the market.
Emphasis on price action on days when volume falls. Open form only.
A form of OBV emphasizing the daily percent change.
This indicator considers only volume. It is the difference between a short moving average of volume and a long one. It is used to confirm volume patterns in relation to price patterns. Closed form only.
A version of Gerald Appel's Moving Average Convergence/Divergence Indicator created by Buff Dormeier that uses volume-weighted moving averages in place of the two main exponential averages of price.
A histogram of the difference between VWMACD and its signal line. The histogram version is considered to be the more sensitive to changes in trend.
Relative Strength (RS + RSII)
Relative Strength is the ratio of one item to another, typically the ratio of a stock to a market average or index. For example IBM/$SPX. When the line is rising IBM is outperforming the market. There are two versions, RSII plots on the price chart and RS plots in its own chart pane.
These are indicators that have been normalized by plotting 50-period Bollinger Bands on them and then calculating %b. Thus, 1.00 and 0.0 replace fixed reference levels such as 80 and 20 or 70 and 30. You plot the main group and select the indicator to be normalized via 'edit chart'.
Normalized Momentum Indicators
Four momentum indicators normalized with Bollinger Bands.
Chande Momentum Oscillator, (CMO)
The Chande Momentum Oscillator compares sums of recent gains to sums of recent losses. The indicator momCMO is provided separately if you wish to see the standard version.
Relative Momentum Oscillator, (RMI)
The Relative Momentum Index compares momentum in up periods to momentum in down periods. The indicator momRMI is provided separately if you wish to see the standard version.
RSI compares price action in up periods to price action in down periods. Also available as a separate plot normRSI.
This basic trend indicator compares the difference between two averages.
Directional Movement (PDI/MDI)
The indicator compares positive directional movement and negative directional movement as defined by Welles Wilder.
Moving Average Convergence Divergence (MACD)
This is the normalized version of MACD, a very popular trend indicator.
Compares the bodies of Japanese Candlesticks (the open versus the close) over time. (In up trends the closes tend to be higher than the opens.)
Normalized Volume Indicators
Four volume indicators normalized with Bollinger Bands.
Accumulation Distribution (AD)
Tracks buying pressure (accumulation) and selling pressure (distribution). AD compares the range between the open and close to the range of the day. It is a concept very closely related to Japanese candlestick charts.
Intraday Intensity (II)
II uses the position of the close in relation to the high and low to parse volume. It is meant to track the activities of institutional traders; large blocks move the market in the direction of their order flow -- increasingly so toward the close.
On Balance Volume (OBV)
One of the oldest and best known of all the volume indicators. Popularized by Joe Granville, it is a good trend indicator. OBV adds volume to a running sum when price advances and subtracts volume from the running sum when price declines. It is meant to model the basic forces of supply and demand that drive the market.