Users: rpccharts: John Bollinger on Bollinger Bands | Interviews With Top Traders

Hello everybody and welcome back. Thanks for joining me for this interview today. We're speaking with John Bollinger. I don't even really need to introduce him. Everybody knows of Bollinger Bands and John's become quite a legend over the years with those Bollinger Bands used by almost everybody in almost every platform out there in the world today. We're going to talk to John about what's new and maybe some different ways we can use Bollinger Bands in our trading. So first of all, John thanks very much for joining me on the phone today.

John Bollinger: Well, thank you very much for having me. I'd just like to point one thing out. The other day, I was walking down the aisle in my local supermarket and somebody came up and said, "Are you John Bollinger?" I said, "Yeah." He said, "I thought you were dead."

Tim Bourquin: That's funny.

John Bollinger: So my work may have achieved legendary status, but, you know, generally, legends are thought of people who have passed on and I haven't quite passed on yet.

Tim Bourquin: Yeah, obviously. And, you know, sometimes people's work is greater after they're gone. Luckily, you've gotten to enjoy some of the successes of being recognized in the grocery store before that happened.

John Bollinger: Yeah, exactly. We were just talking the other day about Rachmaninoff who was not recognized at all in his lifetime, but of course now, he's regarded as one of the great composers of all time.

Tim Bourquin: Well, let me ask you about the Bollinger Bands because we're going to talk about some of the ways people are using them these days. But as we're recoding this, Bernanke is finishing up his talk, his first Q&A with reporters and whenever I see someone talking about fundamentals and inflation, how do you combine that with such a -- like a market moving event with Bollinger Bands on the technical side to get good signals? I mean how much should I be incorporating on the fundamental side along with Bollinger Bands?

John Bollinger: Well, you know, the bottom line is that once you get beyond the very short-term where news has very disruptive impacts, but once you get beyond a very short-term, price really does impound almost all of the available information very, very quickly. So really the best authority on what's going on is price itself. I can't tell you the number of times over the years that I have, you know, looked at some news event or some question about what's happening in the economy, some question about the direction of where we're going, something like that. And just simply by consulting price, being able to figure out better than most of the talking heads in the media what was going on. There's one other really important aspect to news though and I use this all the time and that's the market's reaction to news. If you have some feeling for whether a given piece of news ought to bullish or bearish, that's really a useful piece of information because then as the news announcement hits, you can look at the market's reaction. So if it's a very bullish piece of news and the market doesn't react to it, in other words the prices don't rise, that's a pretty bearish fact and you can start looking for bearish setups with Bollinger Bands or any technical tools. Likewise, if really bearish news keeps on pounding the market, as it has done on several occasions over the past year and prices are really resistant to the downside, that tells you that, you know, the market is in an accumulation mode. And there's a tremendous amount of buying pressure out there and that you better bias your operations to the plus side. So news is a very important source of information for traders, but perhaps not in the way that most traders want to use it.

Tim Bourquin: Let's talk about just the basics of those Bollinger Bands and using them on a chart for people who are relatively new to that. You know, we look at a common Bollinger Band, it's got the upper band, a middle band, and then the bottom band. Am I looking to buy when it comes off of that bottom band, sell when it comes off the higher band? I know that's a little simplistic, but is that a good start?

John Bollinger: It's a start, but it's only a start and it's not enough. So the basic idea is that Bollinger Bands define whether the price is high or low on a relative basis. So by definition, price at the upper band, prices are high; if price is at the lower band, prices are low. We can then use that information to create trading systems. For example, if you would have come down and tagged the lower Bollinger Band and some measure of accumulation distribution like intraday intensity or Larry William's Accumulation/Distribution Indicator were positive then one could take a buy signal on the first up day, the first strong day after that tag at the lower band. So that's really what we're doing with Bollinger Bands is we're looking to combine price action, Bollinger Bands, and other indicators into rigorous trading systems that take the emotions out of the trading process.

Tim Bourquin: Are there certain timeframes that you've found Bollinger Bands work particularly well, the signals are clean, easier to see for instance? Have you kind of played, I'm sure you have played with those timeframes and seen where it works best.

John Bollinger: Well, you know, I'm a creature of habit like all the rest of us. And when I learned my craft, we called it swing trading. That was a long time ago and our definition of swing trading was quite different than the one we use today. We used primarily daily and weekly charts and we were interested in capturing the big moves in stocks that ran 20%, 30%, 40% and lasted any place from a month to six months. And that remains, you know, my love until today. I've expanded that obviously as the timeframes in the markets have shifted. I now rely more on hourly charts in addition to the daily and weekly charts to give me a little bit more perspective from the short-term basis because as you know there's been so much great shift of emphasis to the short term. But I've seen people use Bollinger Bands on very, very short-term charts, literally just the side of tick charts and I've seen people use it on very long-term data. For example, there's a service that uses Bollinger Bands including %b and BandWidth, the two indicators that go with Bollinger Bands, on aviation safety data that comes in quarterly. So it's really -- you know, they're a set of tools that are applicable across multiple timeframes. I personally still love the dailies and weeklies, but nothing stops people from using them in a multiplicity of other frameworks.

Tim Bourquin: Now, there are some settings too that go along with this. There's not just a single Bollinger Band setting, right? There are different ways you can adjust it?

John Bollinger: Yeah. The defaults are to use 20-periods in the calculation. We use volatility in the calculation of Bollinger Bands. That's how we create the height and depth of bands. So the default is to use 20-periods in the calculation and to set the upper and lower band 2 standard deviations above the middle band, which is a 20-period moving average. Typically, the ranges that we see used run from 10 up to about 50. Generally, if I'm pushing the number of periods that I need down towards 10, what I do is I shift down to shorter term data. And if I'm pushing the number of periods I need for a particular approach up towards 50, I shift up towards longer term data. So I always try to stay, you know, somewhere near 20-periods and I do that by changing the length of the data rather than varying the calculation period for the bands that much.

Tim Bourquin: Now one of the things that I've heard people talking about lately more on blogs and in forums is using multiple Bollinger Bands on the same chart. How does that work?

John Bollinger: Well, you know, this is a technique we developed a long, long time ago and really nobody cared about forever. But in the past year or two, we've seen an explosion of interest in using multiple bands. The obvious way to do it is to set bands at multiple standard deviations. You know, set bands at +/-1 standard deviation, +/-2 standard deviations, +/-3 standard deviations and that is in fact the first application of multiple Bollinger Bands that I ever used, it must be 20 years ago now. You know, that's very useful especially for people who are trying to analyze stocks or financial markets that are trending strongly because then you can look at the interactions. If we're trending upward, you can look at the interaction of price and the multiple upper bands. But I think even more interesting than that is combining bands of multiple timeframes. My favorite combination is 20-period bands and 50-periods bands. And by looking at the way the bands interact, you can get a tremendous amount of information about whether the market is trending or not, when trends begin, when trends end, whether we're in consolidation phases, stuff like that. In fact, I've been working very hard over the past couple of months on a brand new indicator BB Trend that is derived from using multiple timeframes for Bollinger Bands to do trend identification much in the same way as one would use Welles Wilder's ADX (Average Direction Index).

Tim Bourquin: So with that, are you looking for these lines at certain price points to match up and is that a key signal?

John Bollinger: That's in fact what happened. There are two things that you look for. You look for the conjunction of the lines of the bands on one side and the divergence of them on the other side and then you monitor the changes in those dynamics over time for signals.

Tim Bourquin: And how about if I've got them on two different charts? I've got them on a 15-minute chart and an hourly, is it also a stronger signal then if those match up at a certain price level?

John Bollinger: Well, you know, that goes right back to one of the most interesting trading systems that I ever saw. There was a guy by the name of Kachigan. He's actually a statistician and he wrote a system called the Lennox System, must be 25 years ago. And the Lennox System requires that you get the same signal in three different timeframes before you actually acted. And so what you're talking about is essentially a variation of that idea. If you get a buy signal on the longer term chart, you then shift to down to a shorter term chart and, you know, take buy signals on the shorter chart more readily than you would have if you didn't know that you were on a longer time buy signal. And, you know, that's really a fantastic technique frankly in my book. This sort of using the longer term signals a filter for the shorter term signals. For example, if you were on a long-term buy signal also welcome from Bollinger Band setup, you would shift down to a shorter term timeframe and ignore the sell signals frankly and just take the buy signals.

Tim Bourquin: Now one of the things that -- I think you talked about on "Bollinger on Bollinger Bands," I think that's the right book that I'm referring to.

John Bollinger: Only one book. That's the one.

Tim Bourquin: Oh, it is the one, okay. Sorry. In using it in things like oil or the Dollar, what are Bollinger Bands telling you right now and maybe just your personal thoughts about the price of oil, the Dollar? I guess we can even talk about the metals and everything seems to be going up and people seem to be looking for a top, but it's not coming. What are your thoughts on all this?

John Bollinger: Well, you know, one of the markets that people are really interested in right now is the silver market and we're building, starting to build a sell setup in the silver market, but it's not complete yet. And it could easily still be overwritten. See that's the key to using Bollinger Bands is we wait for setups to build themselves and complete and then we take action only when the probabilities are in our favor. So, you know, right now we see silver is setting up for a nice little Bollinger Band sell setup, but we wait for that setup to complete and confirm before we take action.

Tim Bourquin: All right. So what is that? When you say setup, what are you looking for? What is that setup and then what's the confirmation you're looking for?

John Bollinger: Well in silver I think what's going to happen is we're going to get a short term, what we call M-type top with diminishing momentum across the top. Again, this is just the beginning of the setup so we'll be watching it as it develops. But it looks to me like we have put in the momentum peak and we are simply waiting for the final price peak to be put in and then we would look for some weakness to develop. Ideally, what you like to see is the momentum peak occur outside of the upper band and the price peak occur inside the upper band because then you have a new absolute high in price, but not a new relative high that is relative to the Bollinger Bands. And that's just a fabulous setup that we've looked at over the years.

Tim Bourquin: Now as we come in to summer here, it's typically slower in the markets, although in the last few years, it hasn't been as much as it has historically been. What do you like to do over the summer in terms of trading? Do you change anything up in terms of your strategy?

John Bollinger: Well, you know, that gets into the idea of seasonals. For many things, summer is a seasonal sell time including stocks. One of the things that people get confused about all the time is that seasonals are only a rough guideline and when markets are ignoring seasonals, you really need to ignore the seasonals. And when markets are following seasonal patterns, then you can take that information from them. For instance, the stock market right now is really following the seasonal pattern we would expect very closely so we're looking for some distribution weakness from midsummer onwards. So this is one year that I think the seasonals are worth paying attention to in stocks.

Tim Bourquin: All right. And one thing I've got here in my list that I didn't ask you yet, do Bollinger Bands tell us anything about how much size we should be putting on? Is there anything in there that could tell us this is a -- you know, put on half my size, my full size, I really want to get into this. Anything there that you can help us with?

John Bollinger: Well, absolutely. There are a number of different ways to approach that with Bollinger Bands. First of all, you can test the setup over time and see what its probabilities are. Specifically and in terms of position size, see what the relationship of the average winning trade to the average losing trade and pay a lot of attention to the largest losing trades that you see. But the things that I like the most in terms of position sizing with Bollinger Bands is actually to use Bollinger Bands on your equity curve and change the way you deploy your capital by where the equity curve is in relation to the Bollinger Band. Downscaling your position sizes when the equity curve is stretched up against the upper Bollinger Bands and increasing your position sizes when the equity curve is right against the lower Bollinger Band.

Tim Bourquin: Great thought there. You've got a lot of different sites, Bbands.com is the one that always comes to mind primarily. But I think I saw the new DVD series that you've put out there, where can somebody find out more about that?

John Bollinger: Well, you know, it's been five years since I did a seminar and I had done a tremendous amount of work during that. So this past fall, I broke down and I did a two-day Bollinger Band seminar here in Los Angeles and we taped that. So that is a brand new DVD. We've made it into a brand new set of DVDs and they're available at Bollingerbands.com. We focused a lot on trading systems, how to build trading systems using Bollinger Bands. We introduced a number of new Bollinger Band indicators, BB Impulse is one that people are going to be very excited about. And we also focused as you discussed earlier a lot on using multiple Bollinger Bands.

Tim Bourquin: All right. Great. Well, listeners, we'll link to that in the transcripts for today's interview. John, thanks so much for your time today. I really appreciate it.

John Bollinger: Oh, my pleasure. Thank you for having me.