BOLLINGER BAND TACTICS
From the Release THE MASTER SWING TRADER
© 2000 McGraw-Hill and Brooke Publishers.
All Rights Reserved.
Bollinger Bands draw their power through two
important characteristics. First, they exhibit an
underlying trend-range axis just like price or
moving averages. Second, they constrict or expand
as they move. The interaction between these two
forces draws unique patterns as bars unwind through
its boundaries. Candlesticks work especially well
with bands. For example, a Doji that strikes
through a constricting band effectively signals a
short-term reversal.
BBs bend and twist in response to price
movement. These undulations predict how far trends
should stretch before central tendency forces them
back toward a central axis. Complex relationships
develop between price-band direction and price-band
constriction. For example, a trend tends to pause
when constricting bands oppose it. It takes great
skill to predict the bands' ultimate impact on
price but is well worth the effort. More than any
other tool, BBs pinpoint hidden swings and
telegraph whether the profit door lies open or
closed.
Bands may swing through relative highs or lows
and then pull back into proportional retracement to
start another trend thrust. Or they can enter
extended ranges that meander back and forth without
direction. Movement frequently stops dead in its
tracks when price rises into a falling band or
drops into a rising one. Sideways bands can appear
in both rangebound and trending markets. Price
often fails to reach new high or low territory
until bands expand to clear the path. In many ways,
Bollinger Bands predict time better than they
predict price.
Buy Signal
The top Bollinger Band rises toward a test of
the intraday high as Worldcom drops. This sharp
divergence signals the eventual breakout after
price finally reverses off of the bottom band.
Watch band slope closely when bars return to test
important highs or lows. It often reveals the time
and force needed to push price through a S/R
barrier.
The skilled eye watches constricted bands in
real-time to estimate the buying or selling force
required to push them out of the way. They work
extremely well during the second test of an
important high or low. When markets finally break
out, expanding bars often shoot into the band's
edge where congestion forms a flag until the BB
allows further movement. Bands constrict tightly
around narrowing price in sideways markets. Apply
NR7 methodology here to anticipate an impending
positive feedback event.
Bollinger Bands signal early warning of trend
change. Sharp price movement forces bands to expand
outward. When these active markets finally turn
sideways, the bands slowly tighten and roll toward
price. Time passes and the BB door closes on rapid
vertical movement. Experience enables the swing
trader to quickly estimate the time required before
bands will tighten and plan accordingly.
Strong buying or selling may push price well
outside a band. A tall bar can even print
completely through the barrier in extreme
conditions. General tactics suggest that violent
reversals often follow these major band violations.
But trading against these events carries risk since
markets can print a short series of these volatile
bars before the reversal takes place. Also note
that this price action rarely occurs during
intraday markets, except at the open.
Reduce risk by dropping down to the next lower
time frame and waiting for a reversal there before
executing a countertrend position. Odds also
improve if the thrusting bars run into other forms
of S/R that allow cross-verification for the entry
level. Stay defensive during the trade. Once price
returns within the band's limits, the underlying
trend can reappear quickly unless the pullback
generates other reversal signals. Look for Dark
Cloud Cover or a similar candle pattern that fills
any gap created by the bar outside the band. This
complex setup can produce windfall profits if
managed properly.
Swing traders work the quiet middle ground of
Bollinger Bands for consistent profits. Build
strategies that enter countertrend positions at one
band and exit at the other. These swing setups face
far less whipsaws than breakout entries at band
extremes. Keep in mind that the center band
presents a natural profit obstacle that needs
special consideration when calculating reward:
risk. Make sure a safe exit near this center point
still produces a decent profit for the trade.
Multiple Support-Resistance
A broad range sets up profitable swing
conditions for KLA-Tencor. This 13-bar Bollinger
Band combines with simple horizontal S/R to uncover
natural reversal zones at band extremes. Enter a
countertrend position when the prior bar prints a
candlestick reversal outside the band line. Wait
for a break of the center band if no clear signal
arises. Exit if price does not expand quickly in
the other direction or if the signal fails and the
candle shadow gets taken out. Watch S/R closely for
positive feedback that will eventually carry price
out of the sideways market.
Use multi time frame Bollinger Bands to avoid
expensive trend relativity errors. Look at the same
market through 3 different time frames. This
corresponds to one above and one below the chart
that aligns with the holding period. Each setting
produces a different range of band extremes and
relative price location within the indicators.
Match reward: risk to the central time frame but
observe all intervening S/R on the other charts.
Consider whether the holding period allows enough
time to mount barriers and reach targets at other
band levels.
Keep in mind that all bands change dynamically
in response to price. This allows continuous
feedback that shifts target values with each bar.
Experience with this powerful indicator helps swing
traders anticipate how it will move. The longer
that price travels sideways, the tighter the bands
become. Trend change for the bands themselves first
begins with a turn by the band closest to the prior
price trend. For example, when an uptrend prints
along a top band, expect this side of the indicator
to turn down before its twin when price moves into
a range or downtrend.
Combine Bollinger Band study with momentum-based
indicators. This helps filter directional movement
from rangebound markets and improves trade timing.
Add MA Ribbons to price and display the MACD
Histogram across the lower pane. Price often
remains well within band constriction during the
early phases of new positive feedback events. As
these indicators show rising momentum, shift
attention to natural pattern/band breakout levels
and look for entry within narrowing bars.
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