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30

Figure 9.3 Bond market volatility cycle, 30-year T-bond yield, two years. Note the regular distance between the lows in volatility.

we should not be surprised to see a regular pattern to the expansion and contraction of the bands as they reflect volatility about an average, even if such a cycle is not detectable in price. The word regular is the trap. While the volatility cycle of long-term interest rates does seem to have a fairly regular 19-day interval, the volatility cycles exhibited for most other financial instruments are nowhere near as regular. However, it is not the regularity or lack thereof that is interesting. The most interesting conclusion is that low volatility begets high volatility and high volatility begets low volatility. This is the foundation of The Squeeze (see Chapter 15).

The bottom line is that while the rules relating to the statistical nature of the Bollinger Bands hold in a general manner, we can make few assertions based on the statistical validity of the calculations used to compute Bollinger Bands. Clearly stocks are not widgets on a manufacturing line, and trying to treat them as such is foolhardy. Just as clearly, a great deal of effort and creativity has gone into statistics, and there are statistical tools available that can be adapted to the needs of investing.



Chapter 9: Statistics

KEY POINTS TO REMEMBER

Statistical rules hold generally, but not absolutely, for Bollinger Bands.

Regression to the mean is not as strong as it should be.

Use indicators to confirm band tags.

Volatility is cyclical even when price is not.

High volatility begets low, and low volatility begets high.



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