Bollinger Bands are included in a group of studies that display price bands surrounding the trading activity.
Here is a list of the group of studies available in CQG:
- Bollinger Bands
- Keltner Channel
- Moving Average Envelope
- Moving Linear Regression, also known as the Endpoint Moving Average
This post will look at Bollinger Bands. Bollinger Bands was developed by technical trader John Bollinger, a Chartered Financial Analyst (CFA) and a Chartered Market Technician (CMT).
Bollinger Bands are two plots around the trading activity. The bands are two standard deviations, both positively and negatively, away from a simple moving average (SMA). The default parameter for the SMA is 20 bars, but all of the parameters used in the CQG study can be modified by the user.
The basic premise is market volatility can expand and contract. Therefore, by using standard deviation the distance from the SMA will expand and contact, too. This provides the trader/analyst with more dynamic levels to determine overbought and oversold conditions. This daily chart displays the classic Bollinger Bands study.
One point to note and that is as the bar builds throughout the trading session the Bollinger Bands’ values will change. It the market rallies or falls the band values will reflect the updated prices. One solution is to use the previous Bollinger Bands’ values so now you have a fixed reference. This is a 15-minute chart using the previous band values. (This study is included in the PAC at the end of the article.)
Use the cursor to find the value of the bands for the current bar.
Another use of the Bollinger Bands is to identify low volatile periods (the Bollinger Bands are narrowing) which may precede a trend as the market moves to a trending phase, which would cause the Bollinger Bands to expand. This can be determined by simply calculating the difference between the two Bollinger Bands. The CQG study is applied in this image.
We can see above that trading ranges are accompanied with a narrowing of the Bollinger bands and is indicated by the Bollinger Band Difference study levels declining.
However, determining what are low levels are the challenge. One solution is to use a formula such as this in a lookback period:
(The current BDif minus the lowest BDif)/(highest BDif minus the lowest BDif)
This image is such a study.
The StoBBDi study is using a 20-bar lookback.
The Bollinger Bands study is very popular. Here, some modifications were suggested which may lead to further trading ideas.
This PAC will open a new page in CQG IC or QTrader.