Ed, Bollinger Bands were developed by John Bollinger. These bands are based on volatility of prices around a simple moving average. Using volatility to compute the spacing of the bands above and below the moving average causes the space to vary with volatility. Volatility is measured as the statistical standard deviation computed on the same set of data as the moving average.
To calculate the bands, Bollinger recommends using a 20-day moving average. Volatility for the same period is the variation of the data around the average for the last 20 days. This variation is measured by the standard deviation of the data from the average. The actual trading band is plotted some number of standard deviations above and below the average.
Aside from the computational differences, Bollinger Bands are used in the same way as other trading bands. Bollinger developed several rules for these bands that can be used to look for indications of possible price moves.
Here are the rules:
1. Sharp moves in price tend to occur after the Bands tighten, and the closer to the average the better. Since reduced volatility denotes a period of consolidation, the first increase in volatility after a consolidation tends to mark the start of the next move.
2. Moving outside the Bands signals a continuation of the move until the prices drop below or inside of the Bands.
3. Moves starting at one band tend to go to the opposite band.
The current 20 day moving average is 22 13/16. AMTX closed Friday just under that at 22 3/4.
The last breakout for these bands was 9/6/96. The day before this upward move, AMTX closed at 17 after a high for the day of 17 3/4. The 20 day moving average on 9/5 was 17 7/16. So AMTX closed just below the 20 day moving average on 9/5.
Since the price is below the 20 day moving average we would expect the next move to be UP (rule 3). The bands are as tight as the were on 9/5 (rule 1).
I use a standard deviation of 2 as recommended by Bollinger.
In conclusion, based on current AMTX Bollingers Bands we should expect a sharp upward move in price any day now.
As with other technical indicator our best test is to see what the same stock did with the same indications in the past. ICOT/AMTX has broken out in an upward direction from tight Bollinger Bands several times. Those I see are 9/5/96, 3/28/96, 11/25/95, 7/25/95. I first got interested in it as ICOT at 1 13/16. Naturally, I still like it.
Hope this answers your mail on Bollinger Bands.
John |
