Interview With Top Trader and Money Manager John Bollinger

Market players are a diverse breed, drawn to the markets from a variety of backgrounds and disciplines. One trader may have a traditional finance degree. Another may be a former engineer whose skills as a programmer launched an interest in technical analysis. Yet another may be a former lawyer whose interest in investing transformed itself into a full-time trading career.

Analyst and money manager John Bollinger is a case in point. Many traders probably are familiar with him from his regular appearances on CNBC, but few probably know that in a previous career incarnation Bollinger spent his days on the other side of the camera.

It was only after a career in cinematography had run its course that Bollinger, 50, turned his attention full time to the markets. Since doing so more than 20 years ago, he has become a leading figure in the market community as an analyst and commentator, creator of the widely referenced Bollinger Bands indicator, trader and money manager. He is a Chartered Financial Analyst (CFA) and Chartered Market Technician (CMT).

His money management firm, Bollinger Capital Management, provides technically driven money management services to (primarily) high net worth individuals, corporations, trusts and retirement plans, with excess of $10 million under management. His Web sites —, and — offer a number of research and analysis tools for investors and traders alike (see “Bollinger on the Web”).

Bollinger moved to California in 1976 from New York looking for work in the feature film industry after spending most of his time in documentaries and commercials. By the late 1970s, though, he felt the need for a change. He’d been interested in the markets for a while, and a number of circumstances — including an interest in the embryonic personal computer technology — fell into place to usher in a new vocation.

“At one point I ended up owning quite a lot of film equipment and needed a way to keep track of it,” Bollinger says. “That’s what led me to my first microcomputer, in the days before PCs. Simultaneously I was finding the film industry and I were not destined to be one. So at the time I was exiting the film business, I had this microcomputer and was very interested in investing. I really became convinced I was going to leave film in late 1978-79, and I’d had the computer for a year or so by then.”

His interest led him to work with a broker who “remains an extremely good friend,” and who exposed Bollinger to many of the opportunities — and pitfalls — of the markets. He began to research and trade, developing some of the basic principles that would underlie his analysis and trading in the years to come.

“I had realized there was a difference between a company and a stock, and that while fundamental analysis was probably well-suited for analyzing companies, it was not well-suited for analyzing stocks,” he explains. “So I became increasingly interested in the technical side of the business and I started to work with both the microcomputer and a programmable calculator, which was the other tool available in those days.”

Bollinger’s next step was to spend time on a trading desk in a brokerage firm that specialized in futures and options, “where I really got an introduction to a great number of technical techniques,” he says. “The more I explored the world of technical analysis, the more I realized that not only was technical analysis well-suited to the markets, I was well-suited to technical analysis.”

However, in the late 1970s and early 1980s, technical analysis was not nearly as widely accepted as it is now, being the province mostly of futures traders and a small cadre of stock market mavericks. Furthermore, the technological revolution that was largely responsible for making technical analysis accessible to the average trader was just beginning to rumble. Bollinger made the most of the resources available to him at the time, being especially attracted to objective, computerized techniques.

“One of the first things to really catch my attention was the work of E.S.C. Coppock, who was the founder of Trendex, a service that specialized in relative strength work in both stocks and industry groups,” Bollinger says. “I’ve maintained my interest in those topics to this day. At the same time I started reading the ‘classics’ — at the time that meant Edwards & Magee (authors of the seminal book Technical Analysis of Stock Trends). That was the only readily available book on technical analysis at the time.

“But Coppock’s work was of particular interest to me because it was completely computerized — it involved no emotions whatsoever. He used a series of exponential smoothings and frontweighted moving averages to calculate relative strength and trends. He put out an unemotional, quantitative report, and that approach has appealed to me ever since.”

Bollinger then took a job at the customer desk where his broker worked. Fortuitously, the man who sat next to him at the desk turned out to be a contact who helped launch the next stage of Bollinger’s market career.

“Sitting next to me was a fellow who was well acquainted with the chairman of the board of the Financial News Network (FNN),” he remembers. “One day the chairman called him and said he wanted to find someone who was interested in technical analysis and computers in order to combine some resources and create some content for what was then a fledgling financial news network.

(FNN eventually became CNBC.) I was immediately interested. The job would allow me to continue to trade and at the same time give me access to real computer power, which was hard to come by in those days.

“At the same time there was a financial analyst on the radio here in Los Angeles named Ed Hart, and I respected him tremendously. I was a little hesitant to go to FNN, because I was really quite happy doing what I was doing. Then I found out that Ed had signed with them. The opportunity to be near someone like Ed was very attractive so I immediately called them back and signed up.”

Bollinger has been a mainstay on FNN and CNBC since. Interestingly enough, his original agreement with FNN stipulated he would never have to be on air. He was the behind-the-scenes research guy. It seems that Bollinger suffered from more than the average share of stage fright. However, necessity eventually thrust him into the media spotlight.

“One day a year or so later they were rather short-handed and the news director came in, pointed to the cameras and said, ‘You! Out there,’” Bollinger recalls, laughing. “I said, ‘No, no, no.’ But he just said, ‘You don’t understand, I said get out there!’ And that was the beginning. I was terribly awkward and uncomfortable, but by that time I had acquired a fairly good piece of knowledge. I was following the markets very closely in a very unemotional, rational manner.

“Viewers, fortunately enough for me, were kind enough to see through my nervousness and stage fright and see I had something real to offer. And so there was tremendous viewer response which caused a gradual turn in my career until I became FNN’s chief market analyst.”

But even before he became a fixture in the financial media, Bollinger had completed some of the technical analysis innovations for which he is best known. He told us about their origins.

AT: When did you develop the Bollinger Band concept?

JB: Bollinger Bands actually began before I went to FNN. I had done a lot of work on options, warrants and convertibles, all of which involve some measure of volatility in the calculation of their fair value.

I became very interested in volatility [in the late 1970s-early 1980s] and at the same time, after my exposure to Coppock, I had come across a book by J.M. Hurst called The Profit Magic of Stock Transaction Timing. It was a seminal book in cycle analysis. Hurst used trading bands as an analytical tool for cycles, but they were hand-drawn and almost impossible to duplicate in any rigorous way.

But I immediately caught the idea that trading bands were extremely important. Without bands, envelopes or channels to provide a relative reference for high and low, it is almost impossible to successfully compare price action, which is unbounded, to indicator action, which is typically bounded.

I had also become very interested in indicators and had started looking at some of the early volume indicators. I realized that if you combined trading bands and indicators, you’d have a superior approach to the market.

The question became how to implement trading bands correctly. At the time, the only trading bands I’d seen were either Hurst’s hand-drawn bands or percentage bands created by shifting a moving average up or down by a certain percentage.

Both these approaches have a problem. Percentage bands have to be fit by eye every time you open the chart, and not only do they change from stock to stock and market to market, but they change across time. So a lot of the rigor I was looking for became emotional choices about how to fit the bands around the data. What I wanted was a way to automate that process.

Gradually, using an early S-100 computer and a spreadsheet called SuperCalc, through a series of trials and errors, the bands were complete in the form they are today in late 1983 or early 1984. It wasn’t a big thing where I felt, “Ah! I discovered them today!” Like anything else, they came together gradually out of a lot of other possibilities. 

AT: What do you think is most important for traders to understand about volatility?

JB: Volatility is typically calculated by traders one of two basic ways. One is deviation from the average, the other is deviation from the trend. The results can be very different! For example, in a strongly trending market deviation from the average will be large and deviation from the trend will be small. That difference highlights the importance of understanding the measurement of volatility. Use the wrong measurement tools and you’ll be fooled.

AT: What do you see as the operating principle behind Bollinger Bands?

JB: I think they’re really misunderstood in many ways by some people. Bollinger Bands exist solely to answer whether prices are high or low on a relative basis They don’t in and of themselves generate signals except in some very specific and well-defined situations involving W- and M-type bottoms and tops (types of double bottoms and tops). There’s nothing about a tag of the upper or lower band that in and of itself is a signal. A tag of the upper band simply signifies that prices are high. You can then compare the action of an appropriate indicator and arrive at a rigorous trading decision.

The idea behind Bollinger Bands was to be able to compare price, which is essentially unbounded, to indicators, which are mostly bounded. So by creating a relative framework around price, you can then compare price action to indicator action in a rigorous manner — with hard rules — and simplify the trading process. And most important of all, eliminate the emotion from the trading process.

AT: If Bollinger Bands are one piece of the puzzle, what other tools do you use to put the Band information in context?

JB: I prefer volume indicators because they’re not directly correlated to price. You see, unfortunately the technical analysis world has a fixation on the closing price. If you think about it, the data set the technician has to work with is relatively limited — open, high, low, close and volume. In futures you may have additional data — open interest or a sentiment survey.

Almost all analysis is based on the close — that is, moving averages, momentum oscillators and so forth. They’re all based on the close, and the rest of the data set is ignored. Even more stunning, the Wall Street Journal took the open out of the newspaper, so many traders and analysts grew up without any access to the open at all.

Consequently, what wasn’t used very much to start with became almost completely illused. If you drew a pie chart, the close would take up about 75 percent of the analytical activity, the high and low would maybe account for another 15 percent, the open 5 percent and volume 5 percent.

So when you do your analysis, you have to be wary of double-counting. How many times are you going to use the close in your analysis — how much information do you think you’re going to beat out of it?

So we focus on volume indicators because we’re looking for indicators that are not directly correlated to the price structure. By using volume indicators we have an independent variable to include in the analysis and increase the robustness of the approach.

AT: What kind of specific indicators do you use?

JB: My volume indicators of choice include the money flow index (MFI), which is essentially a volume-weighted relative strength index. It works quite well. That’s one approach — volume weighting an existing indicator. A pure volume indicator I like is called intraday intensity, developed by David Bostian. This indicator has also been called accumulation/ distribution and money flow by others. The problem with volume indicators is that taxonomy is a disaster; everybody who delved in the field felt obliged to rename everything.

The formula is:

{(2*C – H – L)/(H – L)}* volume
C = closing price
H = high price
L = low price

It’s a pretty simple approach. The price part of the formula comes out to 1 if the market closes at the high, -1 if it closes at the low and zero if it closes dead in the middle of the range.

Like all good indicators it arose from “first principles.” That is, Mr. Bostian hypothesized that as the day wore on, institutional traders who ruled the market and were working large blocks of stock were increasingly forced to show their hands to get their trades done. [In doing that] they moved the market in the direction of their order flow — increasingly so toward the close. He developed this indicator to measure that activity. It can either be expressed as a line by taking a cumulative sum of the daily readings, or as an oscillator by taking a 21-day sum.

Those are examples of two approaches to combine volume: using price within the daily range to parse volume, or alternately informing an existing indicator like RSI with volume to create a better indicator.

AT: Are short-term trading and longterm trading or investing mutually exclusive disciplines, or do the skill sets overlap?

JB: That’s a double-edged sword. I think the actual processes are quite interrelated and very closely allied with one another. In other words, the techniques that work in the long-term also work in the short-term simply by adapting them to the time frame and testing them to see whether they’re appropriate.

However, I don’t think long-term traders can become short-term traders and short-term traders can’t become long-term ones. I think you really need to find which discipline suits you best and focus on it, whether it’s very shortterm trading, swing trading, intermediate- term, long-term trading.

We each have our own unique risk and reward criteria, and tolerance for pain and volatility and ability to focus. You really can’t go outside your bailiwick and expect a great deal of success. There are going to be a few unique individuals who indeed are able to excel in more than one area, but I think most of us ought to admit that we’re only going to be able to do one thing well, decide what that is, concentrate on it, and learn how to be what in baseball is called a production hitter — to keep on churning it out with a great deal of consistency. 

AT: Do you think there are a few key trading or analysis principles that underlie sound trading of any type or time frame?

JB: Yes, but I’m afraid they’re all the hackneyed expressions we all know.

Look at it this way. What are the dimensions that could improve one’s trading performance? There are really only two areas, if you really distill things. First, you can improve your winloss ratio — the percentage of winning trades vs. losing trades. If you’re at 60/40 you can try to get to 65/35 — I don’t think anybody ever really gets beyond there.

Second, you can try to improve the relative size of your winners vs. the relative size of your losers. So, if your winners are twice as big as your losers you can work on reducing the size of your losers or increasing the size of your winners.

Those are really the only two things you can do to be more profitable. Some people may say, “But you skipped trade frequency.” But I think you’ll find that on close examination, trade frequency is a function of the first two elements.

That means the old item: Create a system and use it; that’s going to get you your winning percentage. Then, let your winners run and cut your losers short. That will determine your win-loss ratio. Those are old and hackneyed expressions, but they work.

AT: Did you have to learn those lessons yourself firsthand in the market?

JB: I’ve had to learn everything I know firsthand! Absolutely everything. That’s the only way you can learn. Things are much different when you actually start trading.

I had a very interesting discussion not too long ago with a gentleman who was showing me a new approach he had developed based on the work of W.D. Gann. It was absolutely fascinating stuff.

So I asked him how much money he made doing this and he allowed that he hadn’t traded it yet. I kind of discontinued the conversation at that point and expressed my sincere interest in finding out how the approach did in real time.

As far as I can determine, it is almost impossible to translate back-tested, simulated systems or approaches into reality. It’s not that good trading approaches can’t be created and executed that way. But inevitably, even if you create a good system using all the proper approaches — making sure the testing methodology is broad and includes proper out-ofsample procedures, and making sure the parameters are robust — you will have a very hard time implementing it, unless you are extraordinarily well-suited to that particular system’s risk-reward criteria.

AT: But do you consider yourself a systematic trader?

JB: I’m in the middle. I use a lot of systems in my analysis, but because I trade a wide variety of markets, that portion of my process that consists of trade selection — what area to focus on — is more intuitive. I believe we have extraordinarily good brains and that they’re capable of processing complex data in a unique and wonderful way. And to ignore that is a disservice — you’re leaving something on the table.

I like to combine the power of intuition with the rigor of a more disciplined approach. I end up with something that takes advantage of the advantages of both while avoiding as much as possible their pitfalls.

I think the most important thing of all is that traders be flexible because the trading environment is not only flexible, it’s complex. And by complex I mean in the mathematical sense, like the weather. The markets are very sensitive to small changes in inputs and can produce very surprising and large-scaled outputs. I think we need to have the courage to understand that our mechanical, rational and analytical approaches may not be able to stand up to the complexity of the task and the data.

Given that, I think we need to approach the markets with a sense of humility and make our approaches as adaptable as possible and scale virtually everything in a relative manner. For example, price is not 39 1⁄2, price is 10 percent of the bandwidth above the upper band. And to the extent that we can make our approaches adaptive to these constantly evolving complex markets we’re trying to trade — and to the extent that we can trade into our strengths — we will be successful. To the extent that we make simplistic mechanical systems we think will conquer the world, and the extent that we expose ourselves to our weaknesses, we will fail.

AT: As someone who operates on a more intermediate time frame, what’s your perspective on the shorter-term online trading environment that’s evolved in the last few years?

JB: I’m all in favor of it, although I suspect there are any number of people trying to do it for whom it is ill-suited — that goes back to what we talked about before.

If you think about the markets the following way, I think you understand why this trading phenomenon is a good thing. At the very finest gradation we have people who are scalping eighths and quarters with no reference whatsoever to the external market. As you widen your focus, you get swing traders, and then longer-term traders and investors, until you get to someone like a Warren Buffet for whom a stock will get down to where he thinks it should be bought or up to where it should be sold once every 10 years or so.

Each of these traders and investors complements the others. The very shortterm ones provide liquidity to the level above them, and so on and so forth. It’s all part of a very big symbiotic system. I think direct access to the markets is a fabulous thing and the increased liquidity in the markets is a good thing. But there are people trying to do this who shouldn’t be, and they’ll be burned — it’s a question of time.

AT: So, what do you see happening in the overall market in the near future?

JB: I very much believe we’ve just made an important intermediate-term bottom (in October 2000) and I believe the overall trend for stocks will be higher well into 2001. Interestingly, just as people are reading this, we’ll just be getting another round of earnings reports. The round we’re just completing was sub-par at best, and suggested this seasonal period of strength between October and May had sub-par potential. By judging the earnings season, they’ll be able to get a really good handle on the potential for the period through May 2001.

Here’s the key to doing so: Each day, you count up the number of stocks that are reporting positive earnings and subtract the number of stocks reporting negative earnings, then divide by the total number of stocks reporting that day.

That number on a one-quarter basis is running in the 16 percent range, which is very low. So if next quarter we’re running in the 25-percent plus range, the outlook for the rally into the middle of 2001 will be very good. If we’re beneath 20, it’s going to be a much more selective environment, a stock picker and sector selector’s market.

The higher that number runs, the less that’s true, because the more concerted the market action is. The lower the number, the greater the emphasis on stock picking and sector selection.

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