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In the 1980s, John Bollinger created a technical analysis indicator called the Bollinger Bands. It consists of three bands: the middle band, the upper band and the lower band.
The middle band is an N-Period SMA (Simple moving average). The lower band is the middle band minus X times an N-period standard deviation of the close price, and the upper band is the middle band plus X times an N-period standard deviation of the close price.
One interpretation of the Bollinger bands is that a trader should buy a stock when its price breaks above the upper band and sell it when it falls below the lower band.
Given this interpretation, I created a composite index, which calculates the number of stocks that are closing above their upper Bollinger band. The composite index indicates that the market is bullish when its value is increasing and bearish when its value is decreasing.
The market index can be smoothed by a simple or exponential moving average in order to reduce false signals.
It is also possible to apply the Bollinger bands to this market index. A buy signal is then generated when the index (the number of stocks closing above their upper band) is above its upper Bollinger band.
The Bollinger band that was used in the composite calculation had an X value of 2 and an N value of 14. I have also added a filter to account only for stocks with a close price higher than 2. This was performed by adding the following line (filter = close > 2;) in the composite index formula. Historical data of this market indicator is associated with the ticker symbol: _STOCKS_ABOVE_BB.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
