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

To: Bob Willett who wrote (504)	4/15/1998 12:11:00 PM
From: Wayners	Read Replies (1) \| Respond to of 927

Sure. I think this description is needed so everybody understands what this indicator does and how it works. The first thing that gets plotted is the "bollinger band width". The "bollinger band width" plot is based on the price plot--with bollinger bands drawn on price. So you have an upper, middle and lower band drawn around (forming an envelope around price). The plain bollinger band width is the distance at any point in time from the upper bollinger band to the lower bollinger band. But since some stocks trade at $5 and others trade at $150 dollars that distance doesn't mean much for the $150 stock as compared to the $5 stock. So we have to normalize the number by dividing the width by an average price near the bands. We use the price at the middle bollinger band. So the "bollinger band width" is the upper band value minus the lower band value, quantity, divided by the value of the middle band. The "bollinger band width" gets plotted as a wavy line. It increases as the bollinger bands on price get wider (during periods of increasing volatility) and it decreases as the bollinger bands on price get narrower (consolidation going towards lower volatility). Now what we'd really like to know is when the "bollinger band width" wavy line is going to reverse direction. For example if we knew ahead of time when the "bollinger band width" was not going to get any narrower, we'd know that a large price move is imminent and we'd just have to get the direction of the move right in order to make a lot of money in a very short period of time. How do we do this? Well we plot "bollinger bands---on the bollinger band width line". These envelopes will show us what the limits are on the current "bollinger band width". When "bollinger band width" is touching or crossing back inside the lower "bollinger band on bollinger band width" we know that volatility is just starting to increase. We can profit off of that volatility increase by looking at the direction of the stock price and if its going up we can buy the stock or buy call options. We also know when a large price move is coming to an end because you will see the "bollinger band width" ducking back inside the upper band. At this point its a good idea to either take profits or write covered calls---and in some cases its a good time to short the stock or buy puts.