Bollinger Band Tutorial and Rules

For those who, like me, are fans of John Bollinger's famous bands, I just made an interesting discovery while poking around on Mr. Bollinger's official site. He offers this in-depth tutorial on the history of trading bands, of which Bollinger Bands are one type, and discusses the development of a predecessor of his bands, called Bomar Bands, by Marc Chaikin of Bomar Securities in the 1970s. The tutorial then goes on to explain how he developed his own bands based on the statistical measure of standard deviation, which makes them highly sensitive to extreme deviations in price.

There is also an excellent discussion of multiple counting of different indicators based on the same information, an analytical error many traders are probably familiar with. Multiple counting can lead you to assume that all your indicators are reinforcing each other with additional information, when they're really just reflecting the same, single piece of data.

The tutorial concludes with these 15 rules for setting up and interpreting Bollinger Bands in your charts. They're a must-read for anyone who uses this indicator regularly, especially if you're prone to overinterpreting them - a risk with any indicator, no matter how nifty-looking and well-designed it is.

Overall, the tutorial's a great free resource and well worth adding to your technical analysis bookmarks.

Speaking of Bollinger Bands, the EUR/USD just completed this classic "tag" of the upper band on my 4-hour charts. But as Bollinger himself cautions in his rules, this is not necessarily a sell signal (if only trading were that easy!)

Related links:
BollingerBands.com
Bollinger Band Tutorial