CI Staff .


Discussion

Nick from NY posted over 2 years ago:

Maybe a future article would focus on how options traders use BB's to trade options.

"Tricks and Tips for using BB's to Trade Options" (Suggested title for article)


Gareth from FL posted over 2 years ago:

This would be easy enough to back test. Maybe someone has done that.


Roger Mckinney from OK posted over 2 years ago:

This is as very interesting technique but it has some serious theoretical flaws. This is exactly the same statistical technique that is used in statistical process control, or quality control. However, in spc most of the variation in the data is totally random because the variation caused by the operator and the tool making the part are limited.

Used on the stock market, it assumes that all variation in stock prices is random, when it is not. Most of the price variation in stocks on a quarterly basis is due to profits, which in turn are the result of investment, management skills, and the business cycle.

Also, the 2 standard deviations rule is based on the normal distribution. So the bands assume a normal distribution and everyone knows that stock prices don't follow a normal distribution.

To be consistent with the statistical theory behind on which Bollinger bands are based, people should use a regression control chart. In such a chart fundamentals such as the ISM survey, durable goods orders, or other good predictors of the stock market act as the "operator" and "tool" to limit the variation in measurements. Then the remaining variation can truly be called random, the 2 SD lines can follow the normal distribution and be legitimate guides to investing.


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