John Bollinger

John Bollinger graduated from the School of Visual Arts with a major in cinematography and only afterwards, began studying the stock market. Perhaps it was his focus on visual arts that led him to see the importance of charts and visual representations in stock analysis. 

But whatever influence this artistic training may have had, the end result is that he has become of the investment world's most respected and widely followed technical analysts. He is a Chartered Financial Analyst and a Chartered Market Technician, both difficult designations to earn.

He is perhaps best known for his Bollinger Bands, which have been widely accepted as a basic tool in technical analysis. Although various forms of trading such bands had been used in the 1970s, it was John who during the1980s, refined these technical and developed the most sophisticated use of this system.

Since then, Bollinger Bands have become one of the most widely used technical indicators and virtually all trading platforms include these bands as part of their basic charting systems.

Bollinger Bands are lines plotted above and below a stock's chart trend, creating a channel or "envelope". The distance above or below the stock price is determined by standard deviation. What results is a band that widens during periods of higher volatility and contracts during less volatile periods. Simply put, these bands show changes in supply and demand for the underlying security.

For those more technically inclined, John explains, "By using standard deviation, the bands can react quickly to large moves in the market. The bands are plotted two standard deviations above and below a simple moving average. For the stock market and for individual stocks, a 20-day period is optimal. Many reversals occur near the bands and the average provides support and resistance in many cases. The short-term trend seems well served by the 10-day calculations and the long-term trend by 50-day calculations."

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From a trader's standpoint, Bollinger Bands are useful in determining when a stock is ready to make a strong move in one direction or another, or whether a stock is poised to break out from its previous trading range. 

For example, if a stock trades for a long time with lower volatility (remaining within the bands) the resulting breakout can be strong as the resolution creates an imbalance in supply and demand as well as the build-up or orders outside the previous trading range. 

Thus, when the price moves outside the bands, a continuation of the trend is implied. In addition, a move that originates atone band tends to go all the way to the other. Says John, "These trading bands answer the question whether prices are high or low on a relative basis."

He continues, "The greatest myth about Bollinger Bands is that you are supposed to sell at the upper band and buy at the lower band. It can work that way, but it doesn't have to. Rather, we have three primary methods to using these bands. In one method, we'll actually buy when the upper band is exceeded and short when the lower band is broken to the downside. In the second method, we'll buy on strength as we approach the upper band, only if it is confirmed by our other indicators, and sell on weakness as the lower band is approached - again, only if it is confirmed. In method three, we'll buy near the lower band, based on certain confirming technical indicators."

Let's take a closer look at one such method. Bollinger Bands are often applied to breakouts - forecasting when a stock or a market will rise above the top of the Bollinger Band envelope. 

Says John, "The major problem with successfully forecasting a breakout is something called a head fake. The term came from hockey. The idea is a player with the puck skates up the ice toward an opponent. As he skates, he turns his head in preparation to pass the defense. As soon as the defenseman commits, he turns his body the other way and safely snaps his shot." 

Thus, to avoid these "fake-outs", trading with Bollinger Bands requires additional confirmation, and John suggests using relative strength and on-balance volume as confirming indicators.

Importantly, this short profile is in no way meant to teach you how to apply John Bollinger's technical strategies to your investing practices. It is a glimpse into a style of investing, and for those who find the approach intriguing, a starting point for additional research. 

One can spend a career - as has John - refining and perfecting these techniques. Readers should not confuse this profile with a lesson in the use of this sophisticated trading strategy.

There is an irony, however, in John's work and reputation. He is widely known and lauded as an expert technician. However, any reader of his Capital Growth Letter will be well aware that his reputation should be based in equal part on his tremendous fundamental skills. I have always found his newsletter - with its ongoing overview of the market, industry groups, and specific stocks -to be an exceptional source of information for long-term investing strategy and general market knowledge.

Meanwhile, his technical assessments are clearly explained through the widespread use of charts, which despite their technical nature, are easily understood and well explained through his commentary. 

He provides coverage of stocks, bonds, precious metals, commodities, currencies, and international markets, and offers detailed asset allocation advice, including a focus on exchange-traded funds and country-specific recommendations. His service provides in-depth coverage of the relative performance of these various groups and sectors.

Thus, he combines a technical and fundamental expertises by using technical analysis to provide clues as to how fundamental factors will pan out and, in turn, impact specific stocks, industries, and markets. He notes that fundamental understanding is important, but it is technicals that provide the guidance.

He once said, "Asking the market what is happening is always a better approach than trying to tell the market what to do." For the more sophisticated technically oriented investor, John Bollinger should be considered the leader of the "bands".