Bollinger Bands: Use Them To Recognize Short-Term Trade Entry Triggers

Published: 13th December 2012
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Bollinger bands, you may recall, are the volatility measures below and above a moving average. Regular deviation is utilized to create a base for the volatility measure. As the volatility increases the Bollinger bands will systematically widen. On the other hand, as the volatility goes down, the Bolliinger bands likewise narrow. Simply put, as volatility rises or goes down, the standard deviation follows suit. Bollinger bands thus have a changing nature that allows them to be used on diverse securities with the standard settings. For the technique described in this article, we're going to modify the Bollinger bands away from their default configuration.

Several charting packages can make the modifications to Bollinger bands prescribed here, but if you don't own one that will accomplish that, or if you don't know where to start, try freestockcharts.com. It's affordable and is also straightforward. Charting illustrations from that website will be used in this document.

This technique makes use of the following four steps:

This procedure utilizes a moving average price as a proxy in place of the trend. Back testing outcomes indicate that a 44-period simple moving average works very well. However it isn't the only one. These moving averages work effectively: between 40-periods and 100-period. It is advised to make trades only in the direction of the curve of this line. Whenever the line is sloping upwards, trade long. When the line is sloping downwards, trade short.

Make use of the Bollinger bands to specify regular stock trading for the past full week by simply setting them to a 5-day average as opposed to the default 20-day average that covers a month of trading. We need this for short term stock trading where we are going to buy and sell between one week to 3 months.

Modify the standard deviations to 1.4 to define a section that includes 90% of normal prices in the past week. When utilizing freestockcharts.com modify the Bollinger band indicator that you have used. Change the standard period to a 5-period configuration and the standard deviation to 1.4. For the center line, don't plot it.

Whenever the moving average is still sloping upwards and also the prices are below the Bollinger band, you have a buy signal.

Below are two good examples:

Example one is a chart on Disney (DIS). The chart illustrates records from January to March. For the month of January, you will see that rates dropped below the Bollinger bands ten times.

http://bollingerbandgenius.com/wp-content/uploads/bollinger-band-strategy.jpg

Each place wherein the selling price dips below the Bollinger band is surely an entry signal. The stock rate keeps rising, as you may have observed, after it falls below the Bollinger bands.

These signals can easily be duplicated using freestockcharts.com or any other charting package so long as the Bollinger band indicator you've applied can be modified. Change it from the standard duration of 20 to a 5 period along with a 1.4 standard deviation. Do not plot the center line.

You will acknowledge that this is pretty a fairly easy signal to spot and make the most of. Clearly, over the next few months there are numerous times when the price dips below the Bollinger band, and each time the stock goes higher in the course of the following 5 trading days. An essential aspect to keep in mind is that for this entry signal to work at optimum effectiveness, the moving average line has to be in an upward slope.

On the chart, should you have had bought on any one of these ten days where DIS drops below the lower Bollinger band, it would not have been hard to attain a money-making trade. Observe that within a couple of months, the prices increased to 12% when the entry was made in any of those 10 days when the entry indicator was observed. Moreover, at least one day in the next week exhibited an increased price compared to the day when the buy indication showed.

Employing back testing, it had been learned that you'll win 70 percent of the time implementing this kind of buy signal provided that you work with a generous stop loss setting (between three percent and five percent below entry is generous enough) and take your profit anytime rates reach above 2 % from entry.

Moreover, around 10 to 20 percent of the trades you find will be occasions where you can let the trade run in your favor past the original two percent target. The Bollinger bands are therefore not only a curiosity. They can be a highly effective trading instrument if you use the principles outlined here.

Following is the chart for Homebuilders (XHB), our next illustration.

Here is the chart shown from February to May. Notice that in February alone, there are nine different entry signals when the prices fell below the Bollinger bands.

http://bollingerbandgenius.com/wp-content/uploads/Bollinger-band-trading.jpg

Look at the table and you'll see that if you purchased XHB during one of those nine days when the entry signal exhibited, you would have gained 10% the subsequent month. Meticulously following the steps of this investing strategy is crucial and the smallest detail will surely have very significant results. In the XHB illustration, there's an essential detail around May 15. The 44-period moving average has shifted downward.

Following the principle in the initial step gets rid of the potential of entering into a trade following May 15. This keeps you outside of a downward trend in the market which can cause you to lose money. As soon as the moving average peaks and begins to turn over, exit your trades and don't get back into any, using this type of approach, until the moving average line is again moving up.

Bollinger Bands can be utilized in a number of ways. One of the uses of Bollinger bands is in very easily pinpointing very clear and understandable entry signals. It is important to follow every one of the 4 steps exactly to make sure that you don't lose money. Testing suggests that a 44-period simple moving average works the best for this technique. Nonetheless, any moving average between 40-periods and 100-period moving averages will work nearly as well as a proxy for the trend. Pinpointing prices that are pretty much outside of the lines is among the best uses of Bollinger bonds although some may find it unconventional. However, the final results speak on their own.


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Still looking for more Bollinger Band Trading information? Check the page. This hyperlink provides more information around Bollinger Band Signals.

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