Limitations of Bollinger Bands and a Proposed Volatility-Band Fix

Summary

The document reviews limitations of Bollinger Bands, which place standard-deviation ranges above and below a simple moving average. It challenges the probabilistic interpretation of those bands: observed prices do not necessarily fall within the bands at frequencies expected under a Gaussian distribution. It also points out that the moving-average basis introduces lag and that the relationship between price and band width changes across timescales.

The text introduces a version proposed by David Rooke as a fix, citing an article from Futures magazine, but does not describe the revised formula or provide comparative tests. It therefore serves as a problem statement rather than a complete method. Traders should not infer that standard-deviation bands guarantee normal coverage probabilities; the document offers no evidence that the proposed replacement resolves the issues or improves trading performance.

Key ideas

• Bollinger Bands plot standard-deviation distances around a simple moving average.
• The moving-average basis can make the bands lag price behavior.
• The observed price-to-band relationship may not match Gaussian coverage expectations.
• The price-to-band relationship is described as varying across timescales.
• A revised volatility-band approach is mentioned, but its formula and evidence are absent.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.