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Bollinger Bands for analysis of machinery industry

Bollinger Bands gauge fluctuations in production and sales in machinery industry

Bollinger Bands, a gauge of the fluctuation range of sizes and widely used in financial analysis, also provides useful services for the analysis of production and sales in mechanical engineering industry.

Update October 31st, 2018 - This overview is intended to make it clear how Bollinger Bands can be used to correctly and helpfully classify fluctuations in production and sales. 


Let's take a look at the diagram of sales in machinery industry from 2016 to 2017 in billions of euros.

Production of German machinery industry from 2016 to 2017.

The lines the diagram is showing

Which lines does the chart show in detail?


The blue oscillating lines indicate the monthly sales in €bn. Amid these sales lines lies the dark red line of the moving yearly average of sales. 


The pink-colored lines illustrate the fluctuation range of sales. They are situated to both sides of the average value in a distance of two standard deviations each. This construction is well-known as Bollinger Bands.

Applying Bollinger Bands to machinery industry's sales

Let's take the figures for January 2017 as an example.


In January 2017 sales of the machinery industry was €15.9 bn (in the diagram as a blue line). The average of sales over the last 12 months, i.e. from February 2016 to January 2017 inclusive, was €19.1bn in January (the dark red middle line in the chart). The value of the upper Bollinger band in January was €23.0bn (upper pink band) and the lower Bollinger band was €15.2bn (lower pink band).


So sales in January were €3.2bn below the average of the past 12 months. The simple and clear statement is: sales are lower than the average of the last 12 months.


But how is this deviation of €3.2b to be classified, to be judged? Is it high, very high or "normal" or even very low? This cannot be assessed without further information.


Such further information is provided by the Bollinger Bands.


For January, the Bollinger Bands provide a value of €23.0bn by the upper band and €15.2bn by the lower band. Each of these two values measures the double (standard) deviation from the average sales of the last 12 months, i.e. from February of the last year to the current January. At the same time, the two double standard deviations cover 95% of all sales values.  


This means the following for the classification of January sales:

 

  • The €15.9b lie within the Bollinger Bands, belong thus to the 95% of all sale values. Thus a turnover of €15.9b is not an extremely bad value but a value in the normal range.

  • At the same time this fact means that the €3.2bn deviation of January's sales from the average sales of the last 12 months is also not an extreme situation but in the normal range, normal in the sense of 95% of all values.  Afterwards the deviation could have amounted to even €3.9bn and would be still within the normal range, within the Bollinger Bands.

  • However, the €15.9b are close to the lower Bollinger Band. If they lay outside the lower Bollinger Band in the future, an extreme situation would occur.


So Bollinger Bands allow the statement that there is no extreme situation, neither in the sales level nor with regard to the deviations of this sales level from the average of the last 12 months. In the future, however, increased attention will be paid to the situation that the sales figures should be below the lower band.

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