Bollinger Fibonacci

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The Fibonacci Bollinger Bands indicator is similar to the standard Bollinger Bands indicator, which was developed by John Bollinger. The Fibonacci Bands are based on the same principles as Bollinger Bands by building upper and lower bands on the stock's volatility, but using Wilders Smoothed ATR (Average True Range) instead of using the Standard Deviation.

Like the Bollinger Bands, Fibonacci Bands have a moving average as a middle band. However, Fibonacci bands have three upper and three lower bands in contrast to the Bollinger Bands that has only one upper band and one lower band. The Fibonacci bands are constructed by multiplying the ATR by each of the Fibonacci factors (1.6180, 2.6180, and 4.2360) and then adding (for upper bands) the results to the middle band and subtracting (for lower bands) the result from the middle band. Overall, the Fibonacci Bollinger Bands Calculation can be separated into five steps:

1. Build a Simple Moving Average (SMA) of the close price as middle band;
2.  Calculate the ATR;
3.  Construct the first level bands: first upper band by multiplying ATR by 1.618 and adding the result to the middle band and first lower band by subscripting the result of multiplying ATR and 1.618 from the middle band;
4.  Construct the second level bands in the same way that the first level bands were build by using the second Fibonacci factor (2.618);
5.  The third level bands are made in the same way as the first and second level bands by using the third Fibonacci factor (4.236).

The Average True Range (ATR) is used to measure a price price's volatility. Applying ATR to a simple moving average ensures that the upper and lower bands will react quickly to price movements, taking into account periods of high and low volatility.

In technical analysis, Fibonacci Bollinger Bands can be used for visual analysis of price volatility. An ability to identify volatility helps to adapt a trading system to generate signals in time and neither too late nor too early. At the same time, monitoring changes in volatility may prompt you to monitor the stock (security) for a possible change in the trend.

Chart 1: S&P 500 index (^SPX) chart with Bollinger Bands Fibonacci Ratio

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