BOLLINGER BANDS BASIC USAGE AND LIMITATIONS
are popular among traders because of their simple way to detect in market and redefine accordingly. These are some basic usages of original Bands:
- Most commonly works on 20 period as Basis / Middle Line and standard deviation of 2 for detection.
- Upper and lower bands can act as which accordingly update with standard deviation of same period as of .
- As upper and lower bands act as measure which benefits in Squeeze detection and breakout trading.
- Original use 20 period as Basis which itself restricted to some number of data pints and if market moves in one direction or simply goes sideways for long time; candles can stay on either bands for long time. This gives benefit for staying in directional trade but will completely nullify the use of both bands as .
- Above point simply be explained as markets can stay overbought / oversold for long time and one way to make more useful is to simply use higher periods in but as we know with higher periods becomes more laggy and less adaptive.
- Most traders use BBs alongside some other Oscillator for example "On Balance Volume" but that does solve BBs limitations issue that it should be more adaptive to detect in market.
VOLUME ADAPTIVE WORKING PRINCIPLE
- Best way to make original more adaptive was to just use dynamic length instead on constant 20 period. This dynamic length had to be based on some other powerful parameter which can't be as BB itself is a indicator and adapting its length based would have been superimposing on giving unrealistic results.
- For adaptive length, I tried using Volume and for this purpose I used my Relative Strength Index "RVSI" indicator. RVSI is the best way to detect if Volume is going for a breakout or not and based on that indication length of Basis Moving Average changes.
- RVSI breaking above provided value would indicate Volume breakout and hence dynamic length would accordingly make basis moving average more over fitted and similarly standard deviation of achieved dynamic length would give better bands for . Similar case would happen if Volume goes down and dynamic length becomes more underfit.
- According to my back testing studies I found that wasn't the best choice for dynamic length usage in Basis. So, I used Adaptive Deviation Scaled Moving Average (AEDSMA) which is more adaptive and already modified to adapt with RVSI.
SLOPE USAGE FOR TREND STRENGTH DETCTION
- Adaptive are more reactive to market trends so, I used slope for trend strength detection.
- If slope of Adaptive Basis (i.e. AEDSMA), Upper and Lower Bands is supporting a trend at same time then script will provide signal in that direction. That signal can also use Volume as confirmation if trend direction is supported by Volume or not.
DYNAMIC COLORS AND TREND CORRELATION
I’ve used dynamic coloring in Basis (AEDSMA) to identify trends with more detail which are as follows:
- Lime Color: Slope supported Strong Uptrend also supported by Volume and or whatever you’ve chosen from both of them.
- Fuchsia Color: Weak uptrend only supported by Slope or whatever you’ve selected.
- Red Color: Slope supported Strong Downtrend also supported by Volume and or whatever you’ve chosen from both of them.
- Grey Color: Weak Downtrend only supported by Slope or whatever you’ve selected.
- Yellow Color: Possible reversal indication by Slope if enabled. Market is either sideways, consolidating or showing during that period.
- Green Circle: Market good for long with support of and or whatever you’ve chosen from both of them.
- Red Circle: Market good to short with support from and or whatever you’ve chosen from both of them.
- Flag: Market either touched upper or lower band and can act as good TP and warning for reversal.
I’ve included Fibonacci multiple bands which would act as good zones. For example, 0.618 Fib level act as good local in both upper and lower zones. Fibonacci values can be modified but should be lower than 1.
- I’ve set default Minimum length to 50 and Maximum length to 100 which I’ve found works best for almost all timeframes but you can change this delta to adapt your timeframe accordingly with more precision.
- Dynamic length adoption is enabled based on Volume only but can be selected which is already explained above.
- Trend signals are enabled based on Slope and Volume but can be enabled for more precise confirmations.
- In “RVSI” settings "Klinger Oscillator" is set to default but others work good too especially Zone Oscillator. For more details about Breakout you can check “MZ RVSI Indicator".
- ATR breakout is set to be positive if period 14 exceeds period 46 but can be changed if more adaption with is required.
- EDSMA super smoother filter length is set to 20 which can be increased to 50 or more for better smoothing but this will also change slope results accordingly.
- EDSMA super smoother filter poles are set to 2 because found better results with 2 instead of 3.
So far, I've achieved better results with "Klinger Oscillator" in RVSI but TFS Oscillator and can be used which would change dynamic length differently. It doesn't mean that results would be wrong with some oscillator and precise with others but every oscillator works in its specific way for and RVSI just detect strength of Volume based on provided oscillator.
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