According to Bollinger, there is a pattern, which raises more questions than any other aspect lines Bollinger. He calls it. According to him, his indicator is moving under the influence of market volatility, as it is a pure reflection. This article will just see how this technique can help the merchant to identify discoveries.
Short description
Bollinger Bands use upper and lower limits of the standard deviation with the central Simple Moving Average to determine points of bursts and downs of volatility. While predicting the future movement of prices and price cycles - not an easy task, change and volatility cycles to determine quite easily. This is due to the fact that periods of low volatility are followed by periods of high volatility, as a lull followed by a storm, which is inevitably followed calm.
Equation
Channel width = Bollinger (upper line Bollinger (20 slots)) - bottom line Bollinger (20 slots)) / simple approximate moving average (20 slots).
When Bollinger band reaches the minimum value for the last 6 months, we can talk about formation.
When Bollinger Bands are a great distance from each other, the volatility is high, and when they approach one another - the volatility is low. activated when volatility reaches six-month low and is determined when Bollinger bands are a minimum distance from each other for the last 6 months.
Determine the direction of the breakthrough
The next step - determining the price movements after the break - is far more complicated. Bollinger said that after determining the direction of the breakout, you should pay attention to the testimony of other indicators to obtain confirmation of the data. He proposes to use for this purpose the relative strength index (RSI), along with one or two of the indicators, as an index of the intensity of David Bostiana or Index Accumulation / Distribution (developed by Larry William).
Presence of a positive divergence, that is, the light is directed upwards, while prices are moving down or consolidate, signal a bullish trend. To confirm this hypothesis, look for volume to increase in periods of growth. On the other hand, if prices go up, and points of divergence, you can expect a downside breakout, especially if the volume increased sharply during the recession.
Another indicator of the direction of the breakout character of the movement can be considered lines of expansion. Occurs when a strong trend, resulting from this explosive instability is often so high that ultimately can turn down the break-up, or top line becomes apart.
Take a look at Figure 1, which shows the stock can break KB Home. May width of the channel reached a low (shown by a blue arrow in the box 2), which was followed by a sharp break higher. Please note that the increase in the relative strength index (RSI) (Appendix 1), together with an increase in intra-intensity (red histogram in the box 2), and the index of accumulation / distribution (green line in the box 2). Both indicators (shown by line A) showed a positive deviation from the current price (shown by line B). Also note that the growth began in mid-April and lasted until the end of July.
Wrong direction
The third condition that must be remembered is that Bollinger calls the wrong direction. There is nothing unusual in the fact that the price is set in one direction immediately after, to fool traders into believing that the crisis will occur in this area, and then make a real and significant movement in the opposite direction. Traders who act too quickly break away from work, you can hit them too expensive, especially if they do not use stop losses. Those who expect the wrong direction, you can quickly shut their original positions and enter the market in the right direction.
In Figure 2, it appears that Amazon.com forms beginning in February 2004. Bollinger bands are a minimum distance from each other, that has not happened for at least a year. There is also a minimum width of the channel for the last 6 months (see line A Box II). Showed a negative divergence between RSI (line 1 I) intraday intensity (line 2 in II), the index of the accumulation / distribution (line 3 in II) and cost (line 4 in III) - all point to break. Having broken the 50-day moving average (orange line in the bottom window of the volume) of the collapse of stock prices, the estimated increase in wave contributions, the volume shows a high probability of price movement down. And finally, the long-term trend line is divided in the first week of February. Break down will be confirmed by the penetration of long-term support line (line 5 in III) and continued growth in the downward movement.
The problem is that the actual shares showed a strong upward trend, and as one of the principles of technical analysis, the dominant trend is maintained until an equal or superior forces begin to act in the opposite direction. This means you can easily receives shares moving in the wrong direction, breaking the trend line, and then suddenly turn around and break. It may be a wrong step up, and then fall apart. When formed terminate against a growing trend, you need to wait for confirmation that the reversal of the trend actually happened, and in the case of a false alarm, are ready to change the direction of trade.
Conclusion
based on the assumption that prices are spinning between periods of high and low volatility. Shares at the lowest level of volatility in the last 6 months, have a narrow channel between tench Bollinger which usually translates into explosive revelations. Using collinear indicators, investor or trader can determine the likely direction of the breakout price. A little practice and you'll be happy to add to the collection of their favorite trading techniques.
Matt Blackman
System of "dual-band compression"
The concept of the system. In March 2008, the active trader magazine tested trading system "forecasts defects Bollinger Bands" (see below), which used indicator Bollinger to identify periods of extremely low volatility, followed by a long position in anticipation of a breakdown. Testing of the system showed a good profit daily market data for futures, but her work daily data is weak.
"Grabs deals» Trade (McGraw-Hill, 2005), its author, John Carter wrote for an alternative approach in determining the terms "narrow range", which means "compression instability" when Bollinger Bands are complemented second range, this case channel Keltner.
The concept of "net envelopes" has its roots in the 1970s when DMHarst, author of "profitable stock trading magic time» (Prentice Hall 1970), first raised the issue in their study cycles. Idea is that both range settings are used to catch the vibration cycles in injury frequency. A more sensitive setting to catch high-frequency cycle (short-term), while other, less sensitive, is used to reflect the low-frequency cycle (long-term ).
Bollinger Bands expand during periods of high volatility and contract during periods of low volatility, such as "by" trends. Keltner channels (using default settings) is commonly used to determine the "normal" trading range and less sensitive than the Bollinger Bands for price fluctuations. At the heart of our system is an assumption that can significantly reduce volatility in the market is prepared to make a strong whisk. Low volatility situation is a situation where both the Bollinger Bands are inside the Keltner channels.
Movement in the opposite direction of the bands indicates the entrance. Carter's open in both long and short trades. We determine the direction of the transaction with a simple momentum oscillator period exponential moving average of the 12-period moving 5. We have a long position when the oscillator above 0 and go short when it was below zero level.
Dynamics, we also will determine the trade exits. While the oscillator generates a higher high for long transactions or lower lows for short transactions, the system will stay, if not, the position is closed the next bar.
The system was tested on the 60-minute and daily data.
Policy rule.
First Setting. When Bollinger Bands are inside the Keltner channel, ready to handle.
Second A long position is opened if Bollinger moved out of the Keltner channel, and the oscillator is a momentum in the positive territory (above zero), go long in the open of the next bar.
Third A short position is open if Bollinger moved out of the Channel Keltner and Momentum oscillator is in negative territory (below zero), short position at the opening of the next bar.
4th Closing a long position: When the oscillator impulse begins to decline (ie, can not form a new high), closing of the open of the next bar.
5th Closing a short position: When the oscillator intensity begins to grow (ie, can not form the new minimum), cover the open of the next bar.
Setting indicators: Bollinger Bands with 20, two standard deviations Keltner channel will use the period of 20, 12 Momentum Oscillator smoothing period using a 5-period EMA.
Figure 1. Contract is given when the Bollinger Bands signal (blue line) cross from the inside out, Keltner channel (black lines). The system gives a long signal when the value of the oscillator (bottom) positive and vice versa.
Money management (for both tests): 20% equity position (the same money management principles are used to test the "Predicting defects Bollinger Bands").
