mrtools wrote: ↑
Mon Jan 03, 2022 6:24 am
From Mladen Rakic:
In the Bollinger bands common usage people apply the (most commonly) used bands deviation 2 without being aware why that deviation is used.
Based on statistics, if we use deviation 2, then 95.4% of the PRICE must lie between the two bands. And that is true. But to have that, you should use line charts, not bar or candle charts - since with either of those you get a false impression that there is much more than those expected 4.6% of cases when the price breaks out of the bands
This version is made to address that and is keeping the bars/candles prices within the expected % of the normal distribution
PS: compared to regular Bollinger bands, the difference can be significant
Mr. Bollinger, the developer of Bollinger Bands, created Bollinger Bands based on the misconception that stock prices and forex exchange rates are normally distributed.
However, since stock prices and forex exchange rates are not normally distributed but power-law distribution, the assumption is wrong to begin with.
In other words, the 1-sigma,2-sigma and 3-sigma lines of the Bollinger Bands are not 68.26％, not 95.44%, not 99.7% lines, and they do not mean anything mathematically.
This is well known and Mr.Bollinger admits his mistake.
Even though they are mathematically incorrect, it is also true that Bollinger Bands are popular as a trading tool.
Maybe it's better for discretionary traders to be able to visually see squeezes and expansions.
P.S. Please forgive my immature English writing.
At the back of a road in common use is another road in the mountain of flowers; you may take either way but be in time still in bloom.（Rikyu SEN）