An Interview with John Bollinger, creator of Bollinger Bands
- 20 July 2016
- You used to be a cinematographer, but decided to enter the business of stock trading. Why?
As a young man I went to film school and spent the first ten years of my career working on film sets doing special effects photography. I started transitioning into investing after I was active in the film business for 5 or 6 years. By the time I was in the film business for about ten years I realized that I was not taking many film jobs anymore but was spending increasingly more of my time investing. The market was always a passion for me and I just became ever more interested in it. The major factor was probably the introduction of the micro-computer. In 1978 I purchased a micro-computer kit and built a very small computer and almost immediately I realized it would be very useful to employ that computer in Technical Analysis. That was just the beginning of a new career for me and I have focused on it extensively ever since.
- When did you begin to trade stocks and what were your first successes/losses? What did you learn from that?
Like most investors I initially approached investing using fundamental analysis but I found myself losing money. I read some of the technical analysis masters like Martin Pring, Jay Schabacher, Robert Edwards and John Magee and that made more sense to me. The basic difference between fundamental and technical analysis is that the fundamental analyst thinks his estimation of a company is correct and that the market is sometimes mispriced and looks for those opportunities. Technical analysts believe that everything that can be known about a company is factored into the price, and that by analyzing price action you can make educated trading/investing decisions. I found that using technical analysis improved my returns dramatically.
- What is the main trait of a professional trader?
I would say that the most important trait for a trader is discipline; to develop a trading strategy and stick with it. You cannot be a successful trader if you are governed by emotions. You need to understand your strengths and weaknesses learn how to work with them, and not let them govern you.
- What gave you the idea of Bollinger Bands?
I developed Bollinger Bands in the early 1980s and there were several pieces that came together at the same time. First, I was an early computer hobbyist in the days before PCs. I had an early micro computer and thought it could be used to help me with my investing, so I started to computerize the investment process at a very early stage.
I was a budding market technician and one of the early ideas I ran across was trading bands in general; predominately percentage trading bands. Percentage bands are a moving average shifted up and down from itself by some percentage – three, four, five, ten, fifteen percent, depending on the application.
The problem was they had to be fit by eye. At that time technical analysis involved pencil and paper -- we kept charts by hand. When you fit bands by eye, you fit them so they presented the picture that you wanted to see. If you are bullish you present a bullish picture; if you’re bearish you present a bearish picture. This allowed emotions into the trading process; something I understood even at that early stage, was a bad thing. I realised if I could mechanize setting the bands so they were set automatically it would take the emotional bias out of it.
Using CP/M (an early computer operating system) there was a spreadsheet available. One day I copied the formula for volatility down a spreadsheet column and saw that it changed over time. That was a prescient observation. At the time people didn’t understand that ‘volatility’ is volatile. At the time, volatility was thought to be a fixed property of a security: IBM’s beta was thought to be fixed. People really thought that the volatility was a property of IBM and if it changed at all, it changed only very slowly over the life cycle.
To say that volatility (standard deviation) changes dramatically over time was not only interesting, it was heretical. This was the time during which Robert Engle was doing work which would lead to him receiving a Nobel Prize for exactly that observation – that volatility was volatile. It hadn’t been discussed anywhere, but people were obviously thinking about it.
I thought maybe that’s exactly the mechanism I need to set the bandwidth. Through trial and error over a period of several months I came up with the Bollinger Bands.
- Are Bollinger’s Bands the only reason of your successful trading? What are other tools for successful trading?
Bollinger Bands answer a question, whether prices are high or low on a relative basis. By definition price is high at the upper band and price is low at the lower band. That definition – that bit of information – is incredibly valuable but it is even more powerful if combined with other tools, with other indicators for confirmation.
- Can you tell us a couple of indicators that can be used effectively with the bands?
The two Bollinger Band indicators which I first developed along with Bollinger Bands and that I always use are %b, which tells us where are we in relation to the Bollinger Bands and BandWidth, which tells us how wide the Bollinger Bands are. A non-BB indicator I like to use is Intraday Intensity which was developed by the economist David Bostian. II is a supply-demand indicator that uses the position of the close in relation to the high and low to parse volume. It is meant to track the activities of institutional traders who need to trade large blocks and move the market in the direction of their order flow—increasingly so toward the close. When volume is available, it is the first indicator I use to look for confirmation
- Bollinger’s Bands create not only opportunities, but risks as well. Could you explain how some people misinterpret Bollinger’s Bands?
A common error is to think that a tag of the upper band is a sell and the tag of the lower band is a buy. But price can and often does walk up the upper band or down the lower band. Bollinger Bands are most effective when used with other indicators for confirmation, or to interpret price patterns.
- What environment is best suited for usage of Bollinger’s Bands (e.g. day trading, long term trading, bullish, bearish)?
Bollinger Bands can be used in all the financial markets including equities, forex, commodities, and futures and they can be used in most time frames from very short-term periods, to hourly, daily, weekly or monthly. I mostly use daily price charts but Bollinger Bands are very widely and successfully used by forex traders on five minute charts. Bollinger Bands are powerful for analyzing many market patterns. Some of my favorite set-ups are W formations for market bottoms and M formations for market tops. The bands are very powerful tools to clarify those patterns.
- In what situations Bollinger’s Bands cannot give you any valuable information?
Bollinger Bands do not provide continuous advice. Bollinger Bands tell you whether prices are high or low on a relative basis, so when prices are low and the indicators are improving it indicates a buy and vice versa, when price is high and there are deteriorating indicators it is a sell. But looking at a price chart, sometimes price is not relatively high or low, or there is no good set-up. So for that item there is no trading information and you should look for something else to trade where the information is clearer.
- Do you like riskier or safer approach to trading?
I always look to minimize my risks. The point of trading is to make money. Therefore the set ups I trade are where the reward looks high and the risk looks low.
- You made some other trading products, such as “BB Impulse”, “BB Momentum”, programming language “BBScript”. What is the underlying philosophy under all that?
A few years ago I came to understand that a number of new Bollinger Band tools were possible, tools that could usefully replace their non-adaptive analogs. Just as Bollinger Bands are adaptive trading bands, these new tools provide the same powerful updates to some of the basic technical tools.
BBScript is a project I have been working on for years. It is a simple programming language about at the same level as Microsoft Excel in terms of complexity and ease of learning. It is designed for traders who want to develop their own indicators/systems and test them easily without PC based software or the use of a complex programming language.
- What could you advice for beginner traders?
Keep it simple. Learn a few tools and develop a system that works for you. Do not jump from system to system because then you cannot learn from your mistakes. Be disciplined and understand your strengths and weaknesses and develop a trading style that works for your strengths.
- You believe that human’s psychology is important in trading. Does that mean that computers and scripts are better suited for work in stock market?
Possibly, but humans are smart and can adapt, so don’t count intuitive traders out.
- Is there a person or an organization, which you could name as your influencer?
The masters: RichardWykoff, Harold Gartley,Humphrey Neill, Martin Zweig,
John Bollinger, CFA, CMT
About John Bollinger
John Bollinger, CFA, CMT is the president and founder of Bollinger Capital Management. The firm provides money management and proprietary technical analysis research and tools for institutions and individuals. He is a Chartered Financial Analyst (CFA) and a Chartered Market Technician (CMT).
His Bollinger Bands and related tools have been integrated into most of charting platforms and his book, “Bollinger on Bollinger Bands” has been translated into twelve languages.
His website www.BollingerBands.com is the hub for everything related to Bollinger Bands. It is the home of his Bollinger Band Letter and offers free and for pay educational materials as well as information about Bollinger Band Tool Kits available for various financial platforms. www.BollingerBands.it and www.BollingerBands.us provide his indicators and methods for the Italian and US equity markets. He is an active member of the financial community, a featured expert in the financial media, and a speaker at financial conferences worldwide Mr. Bollinger is the recipient of the 1995 Technical Securities Analysts Association of San Francisco Lifetime Award for Outstanding Achievement in Technical, the 2005 Market Technicians Association Annual Award for Outstanding Contribution to the Field of Technical Analysis and the 2015 IFTA Lifetime Achievement Award.