AL,
BB's are a 2X standard deviation ususally using a 20 day moving average. John Bollinger himself says his bands are NOT correctly used when used as a short term trading tool, but a lot of people are trying to. He says it may work some of the time, but sooner or later it will bite you. The problem is mainly the 20 DMA--that is 1 month of trading days. AS I suggested in my previous post to Cacaito, anything longer than an 8 DMA is too long to use for trading. I use 14 day and even 34 day to make sure I am on the right side of the trend only. IOW, if an 8 day oscillator is oversold, but the 14 day and 24 day are still dropping, I wont make the trade against the momentum. I am digressing from your question, sorry.
So, if you look at a BB, the center line is the 20 day MA of the standard deviation of the daily prices, and the BB's are twice that deviation. IOW, BB are a smoothed average of the daily price range as compared to each of the previous 19 days. If the stock is rising or falling rapidly, the width between the bands is wide. As the stock becomes less volatile, i.e. it is "basing" or "moving sideways" or is "flat", the deviation is less and since it is a 20 DMA, the bands slowly converge or "narrow". When they finally become parallel (after many days of the stock basing, there is a tendency for the stock to make a sharp move upwards or downwards. BB in and of themselves wont tell you which way--use other indicators to tell oversold vs overbought, trend lines, MA crossover, etc to tell you which way the momentum appears to be going. Personally, I think using BB as anything other than an alert that a breakout is likely to occur is a misuse of the BB. In general, the more volatile a stock is , the shorter the time it will base, i.e. the BB may narrow till parallel, then quickly diverge again. Also, generally, the deeper the fall, the longer the basing. So the BB can be narrow for from one day to several weeks and at anytime the stock can breakout. See, for the last couple months of John B's newletter excerpts: tfc.com
If you cant get in, go to their main menu: tfc.com
Again, FWIW, every chart I bring up in WOW has several indicators preset--one of these is BB with a 21 DMA (a fibonacci #<gg>) The narrowest point it reached was on 5/29--11 trading days and 1 holiday after the low--again its a lagging indicator.
I know you were joking--as I was with Tuna<gg>
Regards,
Gary |
