John Bollinger is the president and founder of Bollinger Capital Management, Inc., an investment management company that provides technically driven money management services and develops proprietary research for institutions and individuals. He is a regular contributor on CNBC and is a speaker at financial seminars worldwide. Mr. Bollinger is probably best known for his Bollinger Bands, which he developed in the mid 1980s. Over the past two decades, investors and traders worldwide have come to view Bollinger Bands as a reliable tool for assessing expected price action, and the bands are featured on most financial charting software and Web sites. His book Bollinger on Bollinger Bands was published by McGraw-Hill in 2001 and has been translated into seven languages. Mr. Bollinger has also developed several financial Web sites: www.BollingerBands.com, www.BollingerOnBollingerBands.com, www.EquityTrader.com, www.GroupPower.com, www.FundsTrader.com, www.MarketTechnician.com, and www.PatternPower.com....
Modern applications of proven technical indicators can help traders to better combat market volatility, says John Bollinger, who profiles some of his own new technical tools.
We’re talking about market volatility with John Bollinger. John, you released some new technical indicators in the later part of 2010. Tell us how these have been signaling your trades lately.
Well, the past two years have been a really great time for us. After having developed Bollinger bands and the related tools, for many years we concentrated on how to deploy those tools, the built-in trading approaches with them.
We really didn’t work on building new tools and expanding the portfolio. As you point out, we’ve been introducing a steady series of new tools.
A lot of that has been driven by the changing market conditions themselves. For example, Percent B (%B) is an old Bollinger band tool. It’s actually the first indicator that we ever derived from Bollinger bands. It shows us where we are in relation to the bands.
By definition, it is 1 at the upper band, it’s .5 at the middle band, and 0 at the lower band. If we get above the upper band, it’s a value greater than 1, like 1.1. Below the lower band, it’s a negative number like -.2, or something like that.
This allows us to systematize our trading ideas by incorporating %B numbers into our trading system. So, we can say if %B was greater than 1 yesterday and is less than 1 today, it means that we’ve reversed at the upper band. We’ve had a day outside of the upper band, and we’re back inside.
See Interview: John Bollinger Discusses Bollinger Bands
So, we’ve taken those ideas and we’ve expanded them. Percent B is a great example because it was derived from stochastics. As most people know, stochastics uses not only the raw number, but they use smoothings of the raw number to produce fast stochastics and slow stochastics.
See related: 3 Technical Indicators to Start Using Today
Given all the market volatility, we’ve applied exactly that idea to %B. So we now have not only the raw %B, but we have a fast presentation of percent B, which is percent B and a three-day smoothing of percent B. Also, we have a slow presentation, very similar to a slow stochastic, which would be the smoothing of percent B and a further smoothing of it.
Then, I think best of all, we combine all three. We have the fast percent B, the raw percent B, the first smoothing, and the second smoothing. What these do, because of the incredible volatility that we’ve had recently, they add some smoothing to the mechanism that’s generating our signals and help us eliminate some of the whipsaws that we’ve seen in the market recently.
So, what we’re really doing is adapting the older techniques forward to the modern environment by adding new usages of them to an existing portfolio.
So, given all the volatility then, how should the do-it-yourself trader incorporate some of these indicators?
We’ve had quite a run of new indicators here, not only these versions of %B which I introduced, but we’ve done the same treatment for bandwidth, and we have a new indicator called BB impulse, which is what you were talking about before.
So, in this environment, rather than using BB impulse as a raw number, now we can smooth BB impulse a little bit. It shows us where the momentum is in the market.
With the rapid momentum shifts that we’ve seen recently, BB impulse has gotten a little bit hard to read, but the smoothing is much easier to read. So, in this very volatile environment, the smoothings have helped us a lot.