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  • Very interesting indicator Bollinger Bands over Standard deviation

Very interesting indicator Bollinger Bands over Standard deviation

Very interesting indicator Bollinger Bands over Standard deviation
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By jaguar1637 3557 days ago

This indicator "BBoverSTD" for the Bollinger Bands over Standard deviation, can be used to analyse volatility

Volatility. A word that generates panic for investors as well as faster heartbeats for traders. How many times haven’t you tried before to trade only trending markets and catch the momentum ?

According to InvestorWords.com, volatility is the relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility. So volatility is measured by standard deviation (noted with greek lowercase sigma letter). And what’s the most popular indicator based on standard deviation ? You guessed, the famous Bollinger Bands. Bollinger Bands (BB) is one of the first indicators that you have learned to use in trading. You have been told that, there is a signal to buy or sell whenever the market touches one of the bands, followed by a possible walk along the band, and afterwards when price turns away, it will go like that until it touches the moving average. This rule actually doesn’t tell too much. There is nothing saying how much it will walk along the band until it turns back. Which you may find very frustrating on your own … equity. If you graph the basis of this indicator, the standard deviation, you will see a sinusoidal chart. Volatility goes up and down in quite a continuous pattern, without swift moves. Since it’s not making swift moves, it means the volatility itself is more predictible than the price.  Since it’s forecastable, why not using BBs over volatility ? But wait. Standard deviation is relative. It measures the dispersion over the analyzed period. If we add the BBs over the standard deviation, it means we will use the standard deviation of the standard deviation to catch moves in volatility! example1_bboverstdThis time there is no fear of false positives, because the analysed data set, standard deviation of the price, is a continuous function. Second, even if the signal is wrong and the volatility turns back and trends down towards its moving average, there’s not too much damage done, because the volatility is already down when signal is taken, and a move down in volatility will mean less movement in price. The bluish line is the standard deviation of last 20 bars opening price. Signals we are interested in happen when volatility crosses its own upper BB. Of course, we are not interested in crosses with lower BB, because they mean volatility is going down faster than normal. During a trend, a powerful countermovement will appear like the volatility would be going down. Best signals are when crosses with the upper BB happen at a very reduced historical volatility – below 20% of the on-screen range. If you compare with the other signals on chart, BB over price intersections with the price, you can see that this one may cross even when the volatility is within its own BB bands, so this is a way to filter lots of error-prone BB signals that are given by price BB intersections. A good entry-exit criteria would be that the distance between the upper volatility BB band and the volatility to be below 2% of volatility range. Below is the MQL4 transcript of the Bollinger Bands over Standard Deviation indicator.