As you see it goes up strongly first red big arrow. Upper resistance and lower support lines are first drawn and then extrapolated to form bwnds within which the trader expects prices to be contained. So wouldn't it be a bollinger bands tight idea to presort our universe of candidates by fundamental criteria, creating buy lists and sell lists? Weak reversal signals usually take the price to the middle band again, and then the price follows the same course again. Since long aggressive trend develop not that often, there will be on general tjght reversals than continuation cases, still only filter signals form other indicators may help to spot true and false market tops and bottoms. This is the first signal. Hey Chris my confidence in trading bajds increases by every article of yours I read even without paying a dime.
Which one is for you we cannot say, as it is really a matter of what you are comfortable with. Customize them to suit your tastes. Look at the trades they generate and see if you can live with them. Though these techniques were developed on daily charts--the primary time frame we operate in--short-term traders may deploy them on five-minute bar charts, swing traders may focus on hourly or daily charts, while investors may use them on weekly charts.
There is really no material difference as long as each is tuned to fit the user's criteria for risk and reward and each tested on the universe of securities the user trades, in the way the user trades. Why the repeated emphasis on customization and fitting of risk and reward parameters? Because, no bollinger bands tight no matter how good it is will be used if the user isn't comfortable with it. If you do not suit yourself, you will find out quickly that these approaches will not suit you.
First, I teach because I love to teach. Second, and perhaps most important, because I learn as I teach. In researching and preparing the material for this book I learned quite a bit and I learned even more in the process of writing it. The reason effectiveness is not destroyed--no matter how widely an approach is taught, is that we are all individuals. If an identical trading system was taught to people, a month later not more than two or three, if that many, would be using it as it was taught.
Each would have taken it and modified it to suit their bollinger bands tight, and incorporated into their unique way to doing things. The greatest myth about Bollinger Bands is that you are supposed to sell at the upper band and buy at the lower band; it can work that way, but it doesn't have to. In Method I we'll actually buy when the upper band is exceeded and short when the lower band is broken to the downside. In Method II we'll buy on strength as we approach the upper band only if an indicator confirms and sell on weakness as the lower band is approached, again only if confirmed by our indicator.
In Method III we'll buy near the lower band, using a W pattern and an indicator to clarify the setup. Then we'll present a variation of Method III for sells. Method IV, not mentioned in the book, is a variation of Method I. Method I — Volatility Breakout. Years ago the late Bruce Babcock of Commodity Traders Consumers Review interviewed me for that publication.
After the interview we chatted for a while--the interviewing gradually reversed--and it came out that his favorite commodity trading approach was the volatility breakout. I could hardly believe my ears. Here is the fellow who had examined more trading systems--and done so rigorously--than anyone with the possible exception of John Hill of Futures Truth and he was saying that his approach of choice to trading was the volatility-breakout system?
The very approach that I thought best for trading after a lot of investigation? These systems have been around a long time and exist in many varieties and forms. The earliest breakout systems used simple averages of the highs and lows, often shifted up or down a bit. As time went on average true range was frequently a.
There is no real way of knowing when volatility, as we use it now, was incorporated as a factor, but one would surmise that one day someone noticed that breakout signals worked better when the averages, bands, envelopes, etc. Certainly the risk-reward parameters are better aligned when the bands are narrow, a major factor in any system. Our version of the venerable volatility breakout system utilizes BandWidth to set the precondition and then takes a position when a breakout occurs.
First, Welles Wilder's Parabolic3, a simple, but elegant, concept. In the case of a stop for a buy signal, the initial stop is set just below the range of the breakout formation and then incremented upward each day the trade is open. Just the opposite is true for a sell. For those willing to pursue larger profits than those afforded by the relatively conservative Parabolic approach, a tag of the opposite band is an excellent exit signal.
This allows for corrections along the way and results in bollinger bands tight trades. So, in a buy use a tag of the lower band as an exit and in a sell use a tag of the upper band as an exit. The major problem with successfully implementing Method I is something called a head fake--discussed in the prior chapter. The term came from hockey, but it is familiar in many other arenas as well.
The idea is hyderabad forex dealers player with the puck skates up the ice toward an opponent. As he skates he turns his head in preparation to pass the defender; as soon as the defenseman commits, he turns his body the other way and safely snaps his shot. Coming out of a Squeeze, stocks often do the same; they'll first feint in the wrong direction and then make the real move.
Typically what you'll see is a Squeeze, followed by a band tag, followed in turn by the real move. Most often this will occur within the bands and you won't get a breakout signal until after the real move is under way. However, if the parameters for the bands have been tightened, as so many who use this approach do, you may find yourself with the occasional small whipsaw before the real trade appears.
Some stocks, indices, etc are more prone to head fakes than others. Take a look at past Squeezes for the item you are considering and see if they involved head fakes. For those who are willing to take a non-mechanical approach trading head fakes, the easiest strategy is to wait until a Squeeze occurs--the precondition is set--then look for the first move away from the trading range. Trade half a position the first strong day in the opposite direction of the head fake, adding to the position when the breakout occurs and using a parabolic or opposite band tag stop to keep from being hurt.
Where head fakes aren't a problem, or the band parameters aren't set tight enough for those that do occur to be a problem, you can trade Method I straight up. Just wait for a Squeeze and go with the first breakout. Volume indicators can really add value. In the phase before the head fake look for a volume indicator such as Intraday Intensity or Accumulation Distribution to give a hint regarding the ultimate resolution.
MFI is another indicator that can be useful to improve success and confidence. These are all volume indicators and are taken up in Part IV. This is true because in this phase of activity the bands are quite close together and thus the triggers are very close by. However, some short-term traders may want to shorten the average a bit, say to 15 periods and tighten the bands a bit, say to 1. There is one other parameter that can be set, the look-back period for the Squeeze.
The longer you set the look-back period--recall that the default is six months--the greater the compression you'll achieve and the more explosive the set ups will be. However, there will be fewer of them. There is always a price to pay it seems. Method I first detects compression through The Squeeze and then looks for range expansion to occur and goes with it.
An awareness of head fakes and volume equity traded options confirmation can add significantly to the record of this approach. Screening a reasonable size universe of stocks--at least several hundred--ought to find at least several candidates to evaluate on any given day. Look for your Method I setups carefully and then follow them as they evolve. There is something about looking at a large number of these setups, especially with volume indicators, that instructs the eye and thus informs the future selection process as no hard and fast rules ever can.
I present here five bollinger bands tight of this type to give you an idea of what to look for. Use the Squeeze as a set bollinger bands tight. Then go with an expansion in volatility. Beware the head fake. Use volume indicators for direction clues. Adjust the parameters to suit yourself. Method II — Trend Following. It is a confirmation approach that waits for these two conditions bollinger bands tight be met before giving an entry signal.
Of course, the opposite, weakness confirmed by weak indicators, generates a sell signal. In essence this is a variation on Method I, with an indicator, MFI, being used for confirmation and no requirement for a Squeeze. This method may anticipate some Method I signals. We'll use the same exit techniques, a modified version of Parabolic or a tag of the Bollinger Band on the opposite side of the trade.
MFI is a bounded indicator running between 0 and So, Method II combines price strength with indicator strength to forecast higher prices, or price weakness with indicator weakness to forecast lower prices. To set the MFI parameters we'll employ an old rule; indicator length should be approximately half the length of the calculation period for the bands.
Though the exact origin of this rule is unknown to me, it is likely an adaptation of a rule from cycle analysis that suggests using moving averages a quarter the length the dominant cycle. Experimentation showed that periods a quarter of the calculation period for the bands were generally too short, but that a half-length period for the indicators worked quite well. As with all things these are but starting values. This approach offers many variations you can explore.
Also, any of the inputs could be varied as a function of the characteristics of the vehicle being traded to create a more adaptive system. Volume-Weighted MACD could be substituted for MFI. The speed of the parabolic also can be varied. The length parameter for the Bollinger Bands could be. The main trap to avoid is late entry, since much of the potential may have been used up.
One approach to avoiding this trap is to wait for a pullback after the signal and then buy the first up day. Higher levels of all three would pick stronger stocks and accelerate the stops more. More risk adverse investors should focus on high parabolic parameters, while more patient investors anxious to give these trades more time to work out should focus on smaller parabolic constants which result in the stop-out level rising more slowly.
A very interesting adjustment is to start the parabolic not under the entry day as is common, but under the most recent significant low or turning point. For example, in buying a bottom the parabolic could be started under the low rather than on the entry day. This has the distinct advantage of capturing the character of the most recent trading.
Using the opposite band as an exit allows these trades to develop the most, but may leave the stop uncomfortably far away for some. This is worth reiterating: another variation of this approach is to use these signals as alerts and buy the first pullback after the alert is given. This approach will reduce the number of trades--some trades will be missed, but it will also reduce the number of whipsaws. In essence this is quite a robust method that should how much does forex trading cost adaptable to a wide variety of trading styles and temperaments.
There is one other idea here that can be important: Rational Analysis. This Method buys confirmed strength and sells confirmed weakness. So wouldn't it be a good idea to presort our universe of candidates by fundamental criteria, creating buy lists and sell lists? Then take only buy signals for the stocks on the buy list and sell signals for the stocks on the sell list. Such filtering is beyond the scope of this book, but Rational Analysis, the juncture of the sets of fundamental stock options versus cash technical analysis, offers a robust approach to the problems most investors face.
Prescreening for desirable fundamental candidates or problematic stocks is sure to improve your results. Another approach to filtering signals is to look at the EquityTrader. These are front-weighted, risk-adjusted performance ratings, which can be thought of as relative strength compensated for downside volatility. Method III — Reversals. Somewhere in the early s the idea of shifting a moving average up and down by a fixed percentage bollinger bands tight form an envelope around the price structure caught on.
All you had to do was multiply the average by one plus the desired percent to get the upper band or divide by one plus the desired percent to get the lower band, which was a computationally easy idea at a time when computation was either time consuming or costly. This was the day of columnar pads, adding machines and pencils, and for the lucky, mechanical calculators. Naturally market timers and stock pickers quickly took up the idea as it gave them access to definitions of high and low they could use in their timing operations.
Oscillators were very much in vogue at the time and this lead to a number of systems comparing the action of price within percent bands to oscillator action. Perhaps the best known at the time--and still widely used today--was a system that compared the action of the Dow Jones Industrial Average within bands created by shifting its day moving average up and down four percent to one of two oscillators based on broad market trading statistics.
The first was a day sum of advancing minus declining issues on the NYSE. The second, also from the NYSE, was a day sum of up-volume minus down-volume. Tags of the upper band accompanied by negative oscillator readings from either bollinger bands tight were taken as sell signals. Buy signals were generated by tags of the lower band accompanied by positive oscillator readings from either oscillator. Coincident readings from both oscillators served to increase confidence. For stocks for which broad market data wasn't available, a volume indicator such as a day version Bostian's Intraday Intensity was used.
This approach and a myriad of variants remain in use today as useful timing guides. Many modifications to this approach are possible and many have been made. My own contribution was to substitute a departure graph for the day summing technique used for the oscillators. A departure graph is a graph of the difference of two averages, a short-term average and a long-term average. In this case the averages are of daily advances minus declines and daily up-volume minus down-volume and the periods to use for the averages are 21 and The plot is of the short-term average minus the long-term average.
The prime benefit of using the departure technique to create the oscillators is that the use of the long-term moving average has the effect of adjusting normalizing for long-term biases in market. Without this adjustment a simple Advance-Decline oscillator or Up Volume-Down Volume oscillator will likely fool you from time to time. However, using the difference between averages very nicely adjusts for the bullish or bearish biases that cause the problem.
Choosing the departure technique also means that you can use the bollinger bands tight available MACD calculation to create the oscillators. Set the first MACD parameter to 21, the second to and the third to nine. This sets the period for the short-term average to bollinger bands tight days, the period for the long-term average to days and leaves bollinger bands tight period for the signal line at the default, nine days.
The data inputs are advances-declines and up volume-down volume. In a similar vein we can use indicators to clarify tops and bottoms and confirm reversals in trend. Wcheck your volume oscillator, either MFI or VWMACD, to see if it has a similar. If it does, then buy the first strong up day; if it doesn't, wait and look for another setup. The logic at tops is similar, but we need to be more patient. As is typical, the top takes longer and usually presents the classic three or more pushes to a high.
After such a pattern develops look at selling meaningful down days where volume and range are greater than average. What we are doing in Method III is clarifying tops and bottoms by involving an independent variable, volume in our analysis via the use of volume indicators to help get a better picture of the shifting nature of supply and demand. Is demand increasing bollinger bands tight a W bottom?
If so, we ought to be interested in buying. Is supply increasing each time we make a new push to a high? If so, we ought to be marshalling our defenses or thinking about shorting if so inclined. The bottom line here is clarification of patterns that are otherwise interesting, but on which you might not have the confidence to act without corroboration. Method IV — Confirmed Breakouts. The basic pattern is a three-day sequence. Day 3: Intraday - Alert not yet confirmed if we trade higher lower for sell patterns than the close of Day 2.
End of Day: Signal confirmed breakout if we close higher lower than the close of Day 2.
Bollinger Bands Indicator
In the s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it. The Bollinger Squeeze is Based On A Bollinger Bands Strategy. Learn how to trade contracting and expanding market conditions with this awesome indicator. What is a ' Bollinger Band®' A Bollinger Band®, developed by famous technical trader John Bollinger, is plotted two standard deviations away from a simple moving.