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FOREX TRADERS

Interview with John Bollinger

forex traders john bollinger interview

John Bollinger has been an avid researcher of financial markets for many years. He is the well known creator of the Bollinger Bands, adaptive trading bands based on volatility, which are integrated into most of the analytical software and charting platforms currently in use today.

John strongly believes in discipline and simple trading techniques. He insists that stops are incredibly important and hope is something that no trader should have.

On the Forex market, he recommends 4 simple trading methodologies and considers convergences between Bollinger Bands and traditional  technical analysis tools  to be a  very

useful and successful approach. 

In a very positive and straightforward way, John answered FX Trader Magazine questions and explains how he became a trader, how he happened to create the Bollinger Bands, how he prefers to work on the foreign exchange market, and what are the keys to becoming a successful trader.

FXTM

How did you become a trader, having started your career in cinematography?

JB

Many of the skills that I used in cinematography, I use in trading. I specialized in complex special effects photography in high-speed photography of a very technical nature so, as I became more and more interested in the securities markets, I found that many of the analytical skills that I had developed in cinematography were in fact useful in the markets.

FXTM

Which ones of those skills were actually key to your development as a trader?

JB

In order to be a good special effects cinematographer you have to be able to master a very large quantity of technical material, organize that material and bring it to bare at a given point in time, and it’s much the same way that traders prepare for trading . They master a very large value of knowledge, then they have to organize that body of knowledge into a useful trading discipline and then execute that trading discipline in real time, and it’s very much the same process in cinematography.

FXTM

Is trading now your main activity and does it take a lot of your time? What kind of a trader are you?

JB

Trading is in fact my main activity and, as years have gone by, I tend to devote more time to trading rather than less time. I’m not a very short term trader but, I do trade for what I consider to be very short-term trades, usually for 1, 2, 3 or 4 days, up until more intermediate to long-term positions. Occasionally, when I find a very specific opportunity, I will trade it on an intra-day basis, but I don’t do that very much.

FXTM

Would you define yourself as a Swing trader?

JB

You know when I came into this business, they called people like me “Swing Traders”. But the definition was different. Then, a swing trader was somebody who looked to exploit moves that ran in a stock for 20 or 30 or 40%, and would last from a week or two, to 3 to 6 months, or may be even more. Our primary type of chart was the daily chart, and we also used weekly charts. But as the years have passed, the definition changed. Today, a swing trader holds positions from a couple of hours to a couple of days. In the old days, commissions were very high, so that sort of very short term trading couldn’t be done because you had first to overcome the cost of doing the trade. So the combination of commissions being very high, and the spread between the bid and ask being very wide, made very short term trading difficult.

FXTM

You’ve been running Bollinger Capital management  for many years. Which instruments do you trade? Are you mainly an equities trader, or do you also trade forex or futures?

JB

I started out as an options trader and then I learned the futures business. Then, gradually, I became an equity trader, and more recently, I have shifted my focus back towards the futures market, and of course I have a very strong interest in forex.

FXTM

What do you think about Forex as a market?

JB

I was tempted to start exploring the forex market because I saw many reports that said that the sort of technical tools and the sort of techniques that I used worked very well in forex. And I had had experience in my prior operations that suggested that some tools and techniques did indeed work better in some markets. For instance, many traders are very anxious to trade the very largest contracts and the most liquid markets, but as we study technical indicators, we find that technical analysis actually works better in the smaller markets. Your Win/Loss ratios improve and your Profit/Loss ratios improve in the smaller markets. The tools simply work better in the less efficient markets.   

FXTM

Does this mean that when you have less people looking at the market, the market is more prompt to follow technical analysis standards and when you have more people using similar tecniques in liquid markets, this creates noise in the market ? How do you explain this?

JB

That’s correct. Let’s take for example a simple market which trades 100 different stocks. Everybody trades those stocks for years and then you introduce options on those stocks. Some of the players who were in that market start trading the options as well. But the introduction of options brings in a whole new crew of players who start trading options, and because the options business involves the stocks, they start trading the stocks too.

So the volume increases, the liquidity increases, but there is a lot more intention being played, and the market is becoming more efficient. It’s more of a battle.

Then, you introduce and index futures. And some of the equities players and options players start trading the index future because it helps them in their operations. And another whole new group of players will start trading the options and the equities themselves.

So now you have 3 times as many players as you had originally. You have the same market, the same 100 stocks, but the market is much more efficient. There is a lot more activity going on, a lot more noise on the market , a lot of arbitrage going on. So the entire character of the market changes.

FXTM

When you trade, which techniques and instruments do you use? Presumably the main one is the Bollinger Bands.

JB

Of course I use my own work: Bollinger Bands and the related 2 indicators : %B and Bandwith, which are derived from Bollinger Bands . Those are  my primary tools. Interestingly enough, when I focused primarily on equities, I used to do a lot of volume analysis, but on the Foreign Exchange market, volume data is very hard to come by. So I had to give up all my volume indicators. And that was a huge piece of my activity in the equities markets. When I started looking at foreign exchange, I concentrated more on some of the classical tools, like pivot points, or price patterns and where they would occur in relation to the bands. And I started concentrating much more than I had before on the information contained in the various price patterns.

I found it to be a very useful and very successful approach. On the Forex market I found that classical technical analysis tools combined with Bollinger Bands make fantastic opportunities.

FXTM

So you seem to endorse the idea of convergences in technical analysis. If you find 2 or 3 signals at the same time, does that convince you to put up a trade?

JB

Yes, that’s correct. If you get 2 or 3 bits of evidence, let’s say, when the market is coming down pretty hard and you tag the lower band, so you think “this is a pretty good place to look for the possibility of a reversal”. Then you get a price pivot at the lower band and you rally back up toward the upper band and then sell back off again. Then you make another price pivot, which comes inside the lower band. So you’re combining 3 different things here. You’ve got your definition of High and Low that you derive from the bands. You’ve got a W bottom being built by price. And you’ve got some price pivots and some price patterns that lead you into the trade. So you have several pieces of information that help you into a successful trade.

FXTM

You mentioned that you started as an options trader. At the time, volatility and standard deviation were mostly used in statistics, not in trading. So did this experience influence you when you created the Bollinger bands?

JB

Yes. Absolutely. You know any kind of trading bands provide a definition of High and Low, and then you use that definition in your trading process.

When we used fixed width bands in the old days, you always had to keep on adjusting the bands and setting the bandwidth to fit the current price structure, and what happens when you do that is you paint the picture that you want to see, not the picture that is really there.

So if you’re bullish you draw the bands so that you get a bullish configuration, if you’re bearish, you draw them so that you get a besarish configuration, and I recognized that. I knew there had to be some mechanism that would set the bands automatically and would adjust over time.

In those days we believed that volatility was a fixed quantity and it wasn’t variable. But people were beginning to realize that volatility was in fact variable. As I was calculating the volatility for an options position - trying to do an arbitrage between a convertible bond and a warrant, I was calculating the volatilities to try to figure out if one was cheap and one was rich - I copied the volatility formula down a spreadsheet next to a price history. And I saw that the volatility was changing a lot as time went by. That was the key! I had been working on trying to figure out a way to set the bandwidth of trading bands automatically, and I looked at the volatility and said: “Wow, may be this can do it!”. Then it was just a matter of time. I tried out a bunch of volatility formulas, a bunch of calculations, and after a few months I came up with the Bollinger Bands, and the formula hasn’t changed in all these years.

FXTM

Have you ever regretted not to have patented the bands?

JB

No I’ve never had regrets whatsoever. The bands have been very useful in my own trading process, but they are also the greatest calling cards that one could ever want. Everywhere I go, traders are interested in the bands. I travel the world and the very wide adoption of the bands has provided me with many wonderful opportunities. So I don’t regret making the bands open source at all.

FXTM

In one of your conferences, you talked about the misconception about the bands: some traders only sell at the upper band and buy at the lower band. You also talked about “walking up the bands” and explained how Bollinger Bands can be a fantastic trend indicator.  So how many people really understand the bands and are capable of using them in a proper technical way? 

JB

Very few people understand this. And it’s a shame. People think that they should sell at the upper band and buy at the lower band, but there is so much more to the process than that. In a trending market, you can expect the band prices to behave in a certain manner, and when that behaviour starts to change, you have very good indication that the end of that trend is at hand. It might not be an immediate reversal; you may transition to a sideways market, but the bands are very useful in identifying whether the market is trending or not and identifying what types of trading styles are appropriate in any given market.

FXTM

You created BBForex.com, a website that gives education to the forex market on the use of the Bollinger Bands. What is the feedback of the forex market on the Bollinger Bands?

JB

We have very good feedback. I built this site for myself. It was the tool that I wanted to use to trade forex. I have built the tools that I need for my own process. So when I was trading stocks, I built Equitytrader.com. When I got really involved in Bollinger Bands, I built the site BollingeronBollingerBands.com, which is totally devoted to Bollinger Bands, and so forth. So when I got more and more interested in Foreign Exchange, I realized that the sort of tools that I wanted to use weren’t available, so I built the site for myself.

FXTM

On BBforex.com, you teach 4 trading methodologies: Volatility Breakout, Trend Following, Reversals and Confirmed Breakout. Do all 4 techniques work on the forex market? Or is there one that you would recommend more to forex traders?

JB

I think people should choose the method that most suits them. I really like this simple pattern recognition sort of trade, for example using the bands as a guide to highs and lows, or picking reversals in a strong uptrend. The nice thing about that sort of structure is that, usually, you can have a very good idea of where to place your stop, because you know right away that if it goes beyond the prior trough, that you were wrong in your analysis, the risk/reward ratio for this sort of trades is usually pretty good.

FXTM

Do you buy breakouts, or do you prefer to wait for retracements?

JB

I’m very fond of trading the squeeze, but I prefer to buy breakouts only when the bands are very tight together.

FXTM

So you’re waiting for a volatility breakout.

JB

Correct. I don’t like ordinary breakouts when the bands’ width is normal or even wider. But volatility breakouts work quite well on the forex market.  

FXTM

What would be your advice to a new trader? What is the key, in your opinion, to becoming a successful trader? 

JB

When I started in this business, I tried to learn it for a year or two and that was very hard. In those days there was no internet, so you couldn’t make research easily. But I was very lucky. I met a partner who was a futures and options trader in a trading firm, and I apprenticed to him for a year, for free. I kept his charts for him, in real-time, with a pen and a piece of paper, doing point and figure charts. And he taught me a tremendous amount of both what to do and what not to do. This was the best thing which happened to me. But he taught me one important thing. We were talking about systems and what worked in the market – this was 1982 – and the great bull market was just getting under way, and I looked at him and I said: “Well, is this really going to be a giant bull market?” and all the evidence was there that it was going to be, and turned out to be one of the greatest bull market in all time. “So you should really just go out every day and buy the new highest list and stick with it!”.

And he said “Yes, that would work.” But most important, he said: “pick a system, any system, and use it!” and that was the best advice anyone had given to me. Because people forget to execute the plan, they read, they study, they learn they go to seminars, and they sit down to start trading and they have some mediocre results, they get discouraged and they stop.  That’s the wrong thing to do.

People stray, they adjust the parameters, the style, they muck around with the plan that they have agreed in their mind that they were going to execute, and they don’t follow my friend’s advice: he said “pick a system, any system, and use it!”. Don’t muck around and execute this system. And if you do, you’ll be successful.

Of course you have to pick a good system that works and you have to have a good plan , etc. (I’m not trying to make it too simple) but once you’re there, you have to go to work every day and you need to execute the system. You need discipline to march forward. And that’s the difference between successful traders and unsuccessful traders: Successful traders go out there and execute their system.

FXTM

Talking about trading psychology, what comes first in your opinion: do you first  need to have the right psychology, or do you first need to have the right system? In other words, do you get the right psychology if you get the right system? Or do you get the right system if you implement it in the right way?

JB

It’s all about discipline. One day I got in a discussion about stops with my best friend from many years and we got on the idea of Stops. And he absolutely wouldn’t talk about it. It was just as innate to him as breathing. If the trade didn’t work, you killed it! That was another great lesson: “Stops are incredibly important and hope is something that no trader should have.”

FXTM

What’s your opinion about the internet? Do many people contact you? Is it something positive for you?

JB

I love it! I was a very early adopter of the internet. When I started trading it didn’t exist. When it became available I became interested immediately, and I try to stay up with the latest happenings. This instant communication across the world is just fantastic. It has changed technical analysis. It has changed trading and everything else. But change is inevitable and if we want to be successful traders we have to adapt and adjust.

FXTM

After 20 years, are you still researching new techniques, new patterns, and trying to improve the use of the Bollinger Bands?

JB

Yes. But I must say that my actual trading techniques are remarkably simple. Over the years, I have come to understand that, even though we have the best tools, the best computers, the best graphics and the best data, that trading ultimately is a very simple business. If you complicate it too unnecessarily, it won’t work.