Thanks Louis.. I will be writing an article about Bollinger Bands and the volume/Relative Strength or stochastics. I just did not have the time to do what with the website touching up, the newsletter and the watch list. But I tend to use groups of 3: A sentiment indicator, a trend determining indicator and an oscillator. Bollinger bands or even envelopes or any other trading bands are pretty good. I like Bollinger bands becasue they are good for the kind of stocks I follow (hi-performers (not the same as hi-flyers) that I tend to allow the bollinger bands a wider trading range after the initial profit) Bollinger bands are volitility adjusted trading bands (as opposed to envelopes) With earnings plays you are very interested in volatility because the volatility of our stocks tend to increase more than the average volitility for that stock because of the closeness of the earnings report. We are looking to see how much our stock volatility is varying from its average volatility. So bollinger bands are very important because they measure the price changes seen by the stock's volatility. (We use Bollinger bands plotted two standard deviations above and below a 20 day moving price average. The bands form the top and bottome edges of the trading envelope)...
Standard deviations is really a simple term.. How would one determine the width of the trading bands? Well by using 2 standard deviations away from the center moving average (20 day MA). Standard Deviance is a statistical term... 95.5% of the population data in a normal distribution occur within plus or minus two standard deviations of the population mean. If you apply this pretty simple theory to the bollinger bands, this application means that 95% of the stocks' price actions would be limited to area between the upper and lower band, since thy are two standard deviations away from the middle moving average price.
You don't have to plot this by yourself, just set up the Bollinger bands with a 20 day simple moving average and 2 standard deviations in your software (for intermediate term holds ) and 10 day for our short term 1-4 day hold (with an adjustment to 1 1/2 standard deviations) As a rule the standard deviation is sensitive to sharp changes in volatility, so Bollinger bands react more quickly to price changes..
Once you have your Bollinger bands, then you choose your indicator, say the Relative Strength or Stochastic and the volume indicators (Klinger Oscillator, OBV, McCllelan, Positive Volume Index, Up/Down Volume Indicators) helps you with the Stochastic, they are like partners.. It's the second indicator that signals the buy or sell. If it is in line with the bollinger bands ( 'in line' means the prices are in the high end of the bollinger bands but the relative strength is still very bullish and not turning downwards, we have a confirmation of the uptrend, if however there is a divergence and the indicator suddenly turns downward while the prices are hugging the upper bollinger band, we might think about time to sell.) The reverse is also true. If the prices are between the lower bollinger band the the 20 or 10 day MA, or even just hugging the bottom Bollinger Band but the indicator is turning upward it might be time to buy since the trend could be reversing.
Basically you can enter positions when the RSI or Stochastics are slightly below 30 or 20 but moving upwards and ideally you sell when the stock is at the upper bollinger and the RSI or Stochastics are over 70. Of course the breakout can be serious and the stock can pierce the upper bollinger band and ride high on the stochastics as well and then you can hold until the indicator shows a reversal or the slope goes downward (volume indicators are a great confirming indicators in this situation).. that is pretty simplistic but I will organize these thoughts better with charts and illustrations tonight.. since that's how I do my buying and selling. |
