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Strategies & Market Trends : Stochastics -- Ignore unavailable to you. Want to Upgrade?

To: Playin my Cards who wrote (493)	4/13/1998 9:54:00 PM
From: Wayners	Read Replies (3) \| Respond to of 927

The Bollinger Bands, developed by John Bollinger, are a type of envelope which allows you to plot points several standard deviations away from the moving averages to create trading bands (envelopes). Bollinger Bands are plotted at Standard deviation(s) above and below a mean value like the moving average. The basic premise behind using bollinger bands is that the further data points appears away from the mean value or in this case moving average the more unusual or less probable that data point is. When applied to prices for example, when a price sudddenly occurs far away from the moving average, the probability is for the price to return back towards the moving average (a true trading opportunity based on probablities). This is why prices tend to appear to bounce off of upper and lower bollinger bands as prices try to return closer to the mean value or moving average. Of course the longer prices tend to deviate away from a moving average over time, it has the effect of slowly moving the moving average towards the prices. Well I like to apply this theory to a lot more than just prices. I want to know when volatility is unusually high or low and is likely to return or continue going further away from the mean value. That's why I put bollinger bands around stochastics AND ALSO bollinger bands around the "width of the bollinger bands on price". Stochastics without bollinger bands relies on crossovers of %K and %D and identifies overbought and oversold levels at 80 and 20. Well 80 and 20 are too much of an arbitrary limit. In a trending price structure as opposed to an oscillating price structure, you will notice that the stochastic will hardly every get anywhere near either the 80 or 20 level. In a severe downtrend, stochastics will stay within the 0 to 30 area and in a really good uptrend, stochastics will stay within the 70 to 100 area. You can't wait for 20 in an uptrend to get a buy signal--so what do you do? Put bollinger bands around stochastics and it will show you when to expect a reversal (based on probability) in the direction of stochastics and you can then pick out when to buy on stochastics in a strong uptrend or when to go short in a severe downtrend. Its much easier to see this in an actual plot however. It also helps limit the whipsaws and false signals that you typically get with %K and %D crossovers. In Summary: The standard deviation is a calculation that identifies a value that a majority of the plotted values are bounded by. The characteristics of Bollinger Bands include: As volatility goes down, the bands tighten. As volatility increases, the bands widen. The impact of the data on tight bands (i.e. in the cases of price breakouts) cause the bands to begin widening out. Continuation of the trend is indicated when prices move outside the bands like after a breakout. When you see that the bands are not getting any wider because the data is drawing back inside the bands, you know that volatility is not going to get any higher. Reversals in the trend are indicated when the data that is being plotted such as price comes back inside the bands after being outside the bands. The upper and lower bands on price provide the strongest support and resistance when the bands are moderately wide and the moving average and likewise the upper and lower bands are pretty much flat. When data strikes a band that is moving in the same direction as the data, (i.e. when price is decreasing and strikes the lower band which is also declining day by day), the band does not provide as much resistance or support. When data strikes a band that is moving in the opposite direction, i.e. price increases up the upper band on a downtrend and the upper band is decreasing day by day, the band provides an extraordinairy amount of resistance or support. (These situation don't happen all that often but when they do, they are free money. Last one I saw was on IOM as it was going down near $10 to $12.) You get five bollinger band lines with the formulas I posted earlier. One is the upper line, one is the moving average (middle line), one is the lower line, one is a line I draw halfway between the lower and middle line and I draw another line halfway between the upper and middle lines. These middle lines when crosses provide the majority of the buy and sell signals. The middle line provides some of the signals as do the upper and lower lines. Any cross either gives a new signal (a reversal) or confirms the last signal.

To: Playin my Cards who wrote (493)	4/14/1998 9:48:00 PM
From: Wayners	Respond to of 927

I just looked at a chart of GNSA. The last signal I got was a sell on 9 Apr. Its a very low volume stock. The trend is pretty flat/neutral and the bands are wide and peaked, so I'd expect it to fully trade between the upper and lower bollinger bands on price. Upper band is at $5.00. Lower band is at $3.00. I think its likely to drop to support in the $3.25 area over the next week and then bounce back up as volatility decreases it won't go back up all the way to $5.00. It will be something less like $4.50. It was a nice try to get more out of it, but as soon as you see its not going to do what you expect, you've got to just get out. How did you get two sets of signal? It might be because of the low volume. Low volume on a 60-min can cause that problem. That is probably the number one reason why I do not attempt to try to trade low volume stocks. You don't get any of that intraday predictability. You get stuck just using the daily chart. You shouldn't get a margin call just because it went under $5.00. It depends on how much total margin you have left in your account. If you have a large % of your dollars on this one, then you might be subject to a margin call. After that it will probably bounce good. Couldn't get a download of data for PNEC for some reason. <<Wayne, could you do me a favor and look at the chart for GNSA? I bought it the other day at 5 1/4 hoping I could ride it up to 5 3/4 and get out. Depending on if you use daily or hourly stochs and bollinger bands, you get 2 different signals. The hourly (on IQC) shows that the price is pushing the bottom band which is also going down, meaning less support. However, the daily chart shows medium band width that looks like it may be flattening out and the price has bounced to the lower band. Now, to add more to my deliberations, this stock has bounced off the 4 3/4 price every 2 months for last 6 months or so (the chart is pretty amazing as far as timing of the bounces). For these reasons, I would think that it would bottom out at $4.50 at the very worst case (barring no bad news). My problem is that I have some on margin and it dropped below the $5.00 mark. I still have not gotten a call from E*Trade so I'm not sure what to think. What is your feeling on this chart?>>