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22 48 Part II: The Basics  30 1-1-1-1-1-1-1-1-1->- 5/O0 6/O0 7/00 8/00 9/00 10/00 11/00 12/00 1/01 Figure 6.12 Bollinger Bands, Deere & Co., 200 days. Initially, I calculated long-term standard deviation and used it to set percentage bands-in essence an adaptive version of percentage bands and still interesting in certain applications. However, as time passed, the settings drifted out of sync, entailing recalibration. It was then that I had the insight that standard deviation might be calculated in a "moving" manner just as we calculated a moving average (see Figure 6.12). The rest came quickly. The development work on Bollinger Bands was done on an S-100 computer with 32 kilobytes of memory. The operating system used was a CP/M from Digital Research; the programming language was MBASIC, Bill Gatess first Microsoft product. Testing was done in a spreadsheet called SuperCalc. All of this took place in the days before the now-ubiquitous PC, when giants like IBM and Digital Equipment ruled the earth and the Apple Macintosh was but a gleam in Jobs and Wozniacs eyes. In the years since the creation of Bollinger Bands, several other attempts have been made to create adaptive bands, but none seem to have the vibrancy and usefulness of Bollinger Bands. Needless to say, I am very pleased by the wide acceptance my eponymous
Chapter 6: History bands have received. While the rapid acceptance of Bollinger Bands was in part due to the airing they received on the Financial News Network, where I served as chief market analyst from 1983 through 1990, Bollinger Bands were the right tool at the right time, a tool that met a need that was simply not addressed by any other method. If you ever wonder how Bollinger Bands got their name, this is the story. I had been using them for some time without having named them. One day I used a chart that depicted them in an on-air segment hosted by Bill Griffeth, who, in his usual forthright manner, asked what they were called as I explained their use. There you have it-on air, unprepared, at a loss, and out came Bollinger Bands. KEY POINTS TO REMEMBER Bands have a long history. Many analysts have made important contributions. Percentage bands were most common. Bollinger Bands were born in 1983. The key to Bollinger Bands is volatility. Adaptivity is very important.
CHAPTER CONSTRUCTION The construction of trading bands is really quite straightforward. You start with some measure of central tendency and build the bands above and below that measure. The questions are, What measure of central tendency should be used and what determines the interval? For Bollinger Bands the measure of central tendency is a simple moving average, and the interval is delineated by a measure of volatility, a moving standard deviation. What does moving mean here? It means that for each period the analysis is calculated anew. For a moving average, each periods values are drawn from the immediately prior values. For a 20-day average, the most recent 20 days are used. The next day the oldest days data is discarded and the newest included. The same is true for volatility; for each period, the volatility is measured using the immediately preceding periods.
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