Rules about Bollinger bands

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Rules about Bollinger bands

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Date: Sat, 15 Mar 2008 Time: 12:00 AM
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15 Rules about Bollinger bands

1. Bollinger bands provide a relative definition of high and low.

2. That relative definition can be used to compare price action and indicator to
arrive at rigorous buy and sell decisions.

3. Indicators can be derived from momentum, volume, sentiment, open
interest, inter-market data, etc.

4. Volatility and trend have already been deployed in the construction of Bollinger
bands, so their use for confirmation of price action is not recommended.

5. Avoid colinearity. The indicators used for confirmation should not be directly related to one another.
Two indicators from the same category do not increase confirmation.

6. Bollinger bands can also be used to clarify pure price patterns.

7. Rice can, and does, walk up the upper Bollinger band and down the lower Bollinger
band.

8. Closes outside the Bollinger bands can be continuation signals, not reversal
signals.

9. The default parameters of 20 periods for the moving average and standard deviation
calculations, and two standard deviations for the bandwidth are just that,
defaults. The actual parameters needed for any given market/task may be different.

10. The average deployed should not be the best one for crossovers. Rather, it should
be descriptive of the intermediate-term trend.

11. If the average is lengthened the number of standard deviations needs to be
increased simultaneously.

12. Bollinger bands are based upon a simple moving average. This is because a simple
moving average is used in the standard deviation calculation and we wish to be
logically consistent.

13. Be careful about making statistical assumptions based on the use of the Standard
deviation calculation in the construction of the bands. The sample size in most
deployments of Bollinger bands is too small for statistical significance and the
distributions involved are rarely normal.

14. Indicators can be normalized with %b, eliminating fixed thresholds in the process.

15.Tags of the bands are just that, tags not signals. A tag of the Upper
Bollinger Band is NOT in-and-of-itself a sell signal.