John Bollinger on Using Volume and Price

09/27/2012 3:00 pm EST

Focus: STRATEGIES

John Bollinger

President and Founder, Bollinger Capital Management

You know John Bollinger as the inventor of Bollinger Bands, but in the last few months he has done a tremendous amount of work on how traders can monitor volume in the market at certain price levels.

In this segment of the Trader Talk Podcast, I talk with John about using "equivolume" charts, removing time from the chart axis, and focusing on how much volume occurs at certain price levels. The theory is old, yet John Bollinger has made it easy for traders to combine price and volume on charts in a way that is intuitive and simple to read.

At the end of the interview, we also talk about the current markets, and I get Bollinger's take on where this market is headed next, including the signs of a top that he will be monitoring. Find out more at www.BBands.com.

Tim Bourquin: Hello everybody and thanks for joining. My guest today is John Bollinger, a name familiar to all of you, of course the founder of Bollinger Bands and the inventor of Bollinger Bands and John has got some other interesting charts we want to talk about today. Traders are always looking for new ways to look at the markets, John, and you’ve got one called Equivolume charts that you are implementing now, talk about what that is.

John Bollinger: Well, it’s new and it’s old at the same time. That is, it’s new for me and I think it’s going to be new for many traders, but it’s really a very old concept.

When I first came into the business, I was very lucky to stumble across a book called New Methods for Profit in the Stock Market. It was written by Garfield Drew and the first edition of it must have come out some place in the mid’30s or so that is the 1930s, but the one that I have dates from the very early 1950s like 1953. It was just a fantastic survey of the state of technical analysis at the time and had just chockfull of really interesting ideas.

 One of the ideas that intrigued me, but I was never able to actually visualize was something called Trendographs. This was work that was done by an analyst by the name of Quinn starting back in the 1920s. He developed the charting technique called Trendographs and had built up a company called Investographs that had a subscription service for these charts.

What they did that was really interesting was they took time off the X-axis of the chart and they replaced it with volume and it just gave a totally different view. You know investors are always concerned with the passage of time because obviously what we do is we try to earn a rate of return, but when you replace time on the X axis with volume, what you do is you replace time with a measure of supply and demand and it just changes the chart dramatically.

 
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Tim Bourquin: Yes. So now is a good time. We’ll have a chart of this, a picture of this so users, if you want to click on the link to open up this chart now and we take a look at it. So it almost prints a new bar say every 10,000 shares that are traded or how does it know kind of when to go to the next bar?

John Bollinger: Well there are two ways of doing it. The printed bar for every 10,000 shares or every 100,000 shares or whatever is the modern concept, but Quinn’s concept to vary the width of the bars by the amount of volume that occurred in the bars. So if you had hourly bars, it was by the amount of volume each hour, if you had daily bars, it was by the amount of volume each day, or weekly bars, the amount of volume each week and that’s the approach that we’ve taken, the classical approach.

 Now it’s very interesting, people forgot about this charting technique. By the time the ‘50s came around Edwin S. Quinn and Trendographs had basically been completely forgotten about the market. A very smart analyst by the name of Richard Arms basically reinvented the entire idea and he’s the one who gave it the name Equivolume and he went on to write a couple of books about it and basically its popularity today traces back to Richard Arms’ rediscovery of this. So I went and I really love these charts, but they really weren’t available anywhere and the few places that they were available they were done very poorly.

 So we’ve included Equivolume charts on our Bollinger on Bollinger Bands site, it’s got a short name, BBands.com and they are available for free because I wanted to give this back to the community as a way of saying thank you for all the community has taught me over the years.

Next: Let’s talk about how you use these.

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Tim Bourquin: Well let’s talk about how you use these then, John, to find the good opportunities. Is it as simple as I want to see a very thick bar that it means lots of volume that’s green which means lots of up volume and I’m looking at trend that way?

John Bollinger: It can be especially at key places on the chart. In other words, if you had built a little W bottom, a little base, then you’d like to see a thick bar, a thick green bar as you emerge from that base confirming the trade.

One of the things that is really important is that sometimes on the price chart, formations develop and go by and they go by relatively quickly and you can’t really see them. But when you look at them on the Equivolume chart, many times the patterns themselves are much clearer. It’s easier to see that head and shoulders or it’s easier to diagnose that wedge or it’s easier to understand that W bottom because the varying width of the bars stretches out and delineates the pattern better.

 Now what’s really interesting to me is this year especially, old pattern trading techniques like the Wyckoff techniques, which I’m a huge fan of, have really been working very well and a lot of the indicator-based techniques haven’t been working as well. There’s kind of been like a shift in the market back to these older ideas, these classic kind of technical analysis ideas. So I think that this jives really nicely with these Equivolume charts.

Tim Bourquin: I guess it’s the idea that what’s old is new and the fact that supply and demand and the way that moves markets doesn’t change very much over the years really.

John Bollinger: It doesn’t. If you go back and read Wyckoff’s work from the ‘30s, he stressed supply and demand in virtually every other sentence and today with all the high frequency trading and all these other stuff, it’s hard to get a handle on supply and demand.

 We made one change in Quinn’s technique by the way. Quinn compared volume for an individual stock to the volume for each for the market, in other words for the Dow Jones or he used the Dow Jones back in those days but it would be the S&P 500, the New York Stock Exchange today. That’s how he made his widths, that’s how he created the widths with ratio of the volume in the stock to the volume in the market and he had this cute little plastic card that came with the service so that you could update them by hand and such like that.

 But we changed that because we thought that there was so much noise in the market from all these high frequency traders and such. What we did is we let you specify it average to use. So the width of our bars is determined by the volume divided by average volume and you could specify the length of average volume, 50 or 200 something like that is perfectly useful.

But we think this lets you get a better handle on what’s happening with the supply-demand equation because of all the action and the high frequency traders that have flooded this market with volume and has nothing to do with supply and demand.

Tim Bourquin: Do you think that the HFT trading has made time-based charts whether they be tick charts or minute charts, those shorter term charts, are they less useful today than they were ten years ago?

John Bollinger: You know, I’m not sure. I just know that a lot of things have changed and it changed in sometimes very mysterious ways, ways that it’s hard to understand why the changes have occurred.

It’s perfectly clear to me looking at these Equivolume charts that oftentimes they’re clear, but it’s not always true. Sometimes the regular chart is the clearer chart and interestingly enough you can just set the average to one and you’ll see a regular bar chart. So you have the ability to see both a regular chart and an Equivolume chart in the same package.

And there’s one more thing that I love. Just next to the symbol box, there’s a little red spot and if you click that it’ll change color to green. What it will do is once a minute, it will show you a chart of a new stock.

I just leave this program open on my desktop all day and I have found more interesting trade ideas and more interesting setups. Just because they appear and I’m sitting there doing some work or something like that and out of the corner of my eye, I see wow that’s a perfect little W bottom and we’ve just broken out of it or we’ve just finished a wedge there and again and again that happens to me during the trading day.

Next: Does it just pick a stock randomly out of the entire market?

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Tim Bourquin: Does it just pick a stock randomly out of the entire market?

John Bollinger: Yeah. We’ve got 5500 stocks in our database so it just picks a stock randomly out of 5500.

Tim Bourquin: All right and so can you trade on these by themselves? You mentioned kind of using it in conjunction, sometimes the bar charts are easier to read, but could you trade on an Equivolume chart by itself?

John Bollinger: Yeah, I think you could if you were skilled enough. You’d really have to learn how to do that just like anything else. So we have provided a dozen of the most popular indicators that you can plot along with Equivolume for people like myself frankly for people who need some help from indicators in order to make decisions. So we have half a dozen Bollinger Band indicators, five or six volume indicators, and then the classics like relative strength and stochastics, MACD.

Tim Bourquin: John, you know that people are always trying to find new ways to look at charts and new indicators kind of the hot new thing. How do you kind of keep from overload by throwing too many of those indicators on the chart and deciding how much is enough?

John Bollinger: I myself because of the way I trade, I really generally only keep three of those indicators on an Equivolume chart. I put up %B, which is the Bollinger Band indicator that tells you where you are in relation to the bands. I put up bandwidth, which tells me how wide the Bollinger bands are and I put up intraday intensity, which is David Bostian’s volume indicator that’s another measure of supply and demand. So I tend to just use those three, but I respected the idea that other people would have different choices.

 The key to me is that it’s fine to use say 3, 4, 5 indicators but you really want to have them come from different categories, one supply and demand indicator, one momentum indicator, one sentiment indicator, one market state indicator like is the market trending or not like ADX or something like that. So as long as you use separate and distinct indicators that aren’t looking at the same thing, I think you won’t have too much confusion from indicators.

Where you get people crazy and every once in a while at a conference somebody will come up to me with a chart and underneath it there’ll be six or seven indicators. You know they’ll point and say well look here’s a trade that failed but all the indicators confirmed and you look down they’re all six or seven volume indicators so of course they’re all going to confirm.

Tim Bourquin: Right.

John Bollinger: There is not six or seven independent pieces of information there, there’s just one piece of information represented six or seven different ways.

Tim Bourquin: Good point, yeah.

John Bollinger: Yeah.

Tim Bourquin: So using something that looks at different things and then you can really have true confirmation.

John Bollinger: That’s right. So one volume indicator, one volatility indicator, one sentiment indicator, a momentum indicator, there’s four, that ought to really help provide some independent information to help your decision process.

Tim Bourquin: All right. Before we finish, John, I want to ask you about this current market. We’re recording this, listeners, on a Monday. This will be out sometime on the following Thursday so we’re four or five days behind.

But John, getting from you your ideas here on the market. We’ve come a long way in terms of a rally here. You read the Wall Street Journal that it’s not to be trusted yet a rally is a rally in my mind. What are your thoughts here?

Next: Thoughts on the market rally

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John Bollinger: Yeah. I’m sort of in your camp, you know. I mean a rally is a rally. Stock prices are going up. I’m really interested in the fact that when the bears get their hands on the ball, they’re just not able to do anything with it.

You know, you get some bad news in the market, one of the scares comes out of Euro land, that’s usually the worst thing for the market in a current phase. The market down 0.5%or maybe 0.75% or so and then not able to either market down more seriously than that or get a couple of three down days in a row to add up to something more serious. On the other hand, when the bulls get their hands on a piece of news, they’ve been able to mark prices up pretty easily and they are able to get two or three days together in a row on the upside.

So the balance of power in the market clearly seems to be in favor of bulls and until that starts to shift, until we start to see some signs of a classic top and frankly they just aren’t there now, I think you have to play the bullish side of this market. Either that or you’re really going to be fighting against the trend.

Tim Bourquin: What are some of those signs at the top that maybe we should be looking for if we’re close?

John Bollinger: Well tops unlike bottoms take a longer time and they’re more spread out. The most recent high for example was really well confirmed by a 52-week new high on the New York Stock Exchange so that’s a confirmed high. Now we’ve got to look for an unconfirmed high.

Ideally what we’d like to see is a pullback perhaps toward the middle Bollinger band, the 20-day moving average, and then a rally and then examine the market internals in that rally. If the new highs are lacking or if the advance-decline line’s looking poor or if volume in terms of volume on the upside versus the volume on the downside is poor then you can start to worry.

But the most recent high was confirmed by virtually everything, both the daily and weekly advanced declines went to new highs along with price. Again, they were very strong presence, met new highs and so right now we’re in a confirmed bull market. You know, that could change in over the course of a few weeks but we just don’t have the evidence for that yet.

Tim Bourquin: Okay. Well, John, I appreciate your time. Let’s give listeners your Web site so they can check out more of these Equivolume charts.

John Bollinger: Well the easiest way to get to my analytics Web sites is to go to BBands.com or to go EquityTrader.com and when you get to Equity Trader, if you look across the screen, the 1, 2, 3, 4, fifth tab is Equivolume and that again is free for everybody to use.

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