Technical Analysis

  Bollinger Bands Basic Rules

   •One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it. While there are many ways to use Bollinger Bands, following are a few rules that serve as a good beginning point.
       •Bollinger Bands provide a relative definition of high and low.
       •That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
      •Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
      •Volatility and trend have already been deployed in the construction of Bollinger Bands, so their use for confirmation of price action is not recommended.
      •The indicators used should not be directly related to one another. For example, you might use one momentum indicator and one volume indicator successfully, but two momentum indicators aren't
better than one.
      •Bollinger Bands can also be used to clarify pure price patterns such as "M" tops and "W" bottoms, momentum shifts, etc.
      •Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.
      •Closes outside the Bollinger Bands are continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.)
      •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.
      •The average deployed should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-term trend.
      •If the average is lengthened the number of standard deviations needs to be increased simultaneously; from 2 at 20 periods, to 2.5 at 50 periods. Likewise, if the average is shortened the number of standard deviations should be reduced; from 2 at 20 periods, to 1.5 at 10 periods.
      •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.
      •Make no 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 simply too small for statistical significance.
      •Indicators can be normalized with %b, eliminating fixed thresholds in the process.
      •Finally, 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. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.
     

For a free tutorial on Bollinger Bands, please visit http://www.BollingerBands.com/services/bb/
     For a comprehensive book on Bollinger Bands and technical analysis see     http://www.bollingerbands.com/products/?type=book

         Charting Services

Thanks to the many free quote servers on the net, you don't need to subscribe to a data service or charting service just to get basic charts. The following sites offer a whole range of charts for a particular stock, as well as a lot of other information.

• Yahoo! Quotes at http://quote.yahoo.com
  Offers 3-month, 1-year, 2-year and 5-year charts. No registration is required. Pages for a stock include links to research, SEC filings, etc, etc.
• DailyStocks at http://www.dailystocks.com
  Offers various screens and many charts. No charge but registration is required.

McClellan Oscillator and Summation Index

please contact Tom McClellan at (800) 872-3737, or visit the web site at http://www.mcoscillator.com.

Relative Strength Indicator

Here are some resources on RSI.

• The May 2000 issue of AAII Journal included a 5-page article about RSI with examples (they have a two-week free trial membership).
  http://www.aaii.com
• BigCharts offers a free interactive charting feature that includes (among many others) RSI.
  http://www.bigcharts.com
• StockCharts.com has a nice discussion and a spreadsheet with all the formulas.
  http://stockcharts.com/education/IndicatorAnalysis/indic_RSI.html
• The original book by J. Welles Wilder
  New Concepts in Technical Trading Systems

  Stochastics

This article gives the formula for stochastics. The raw stochastic is computed as the position of today's close as a percentage of the range established by the highest high and the lowest low of the time period you use. The raw stochastic (%K) is then smoothed exponentially to yield the %D value. These calculations produce the original (or "fast") stochastics.

%K = 100 [ ( C - L5 ) / ( H5 - L5 ) ]  

%D = 100 x ( H3 / L3 )  

A closely related indicator is the Williams %R indicator. The Williams %R tracks stock price momentum in almost exactly the same way as the stochastic indicator. It is a value between -100 and 0 representing where the closing price of today is positioned in the full range of prices (lowest low to highest high) across the input time period. The value -100 indicates that the current close is also the lowest low in the period, and 0 indicates that the current close is also the highest high in the period. Thus the Williams %R value is always exactly 100 less than the Stochastic %K value.

Here are links to pages at Incredible Charts which explain further:

• Stochastic oscillator
  http://www.incrediblecharts.com/technical/stochastic.htm
• Williams indicator
  http://www.incrediblecharts.com/technical/williams_percent_r.htm

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