Bollinger Band Measurements

mc a98,

I am learning to use support & resistance, too. With grid lines on my chart, I am looking for the "lines being drawn" -- or ranges of support & ranges of resistance.

Again, however, I ask myself which time frame to use. In order to see much support or resistance, I often have to rely on larger time frames than I am trading. Is this what you do?

 

First:
It is suggested by John, that if you drop the SMA below 20 periods, then you should narrow the range of the bands.

His current suggestion is at a 10SMA the bands should be set to 1.9 std. devs. So, at 13 try 1.95?

Second:
The adaptive nature of the bands is a key componant of the bands! During volatility contraction the bands contract. The bands are "best" used within the current time frame -- you can't pick and choose ranges -- the market does that!

Third:
When you say, measure the width of the bands, i assume you mean the price range from the bottom band to the top.

Again, i don't know your trading system. But here is what i suggest:

1: calculate your risk: ABS(number of shares x (stop-entry))

2: calculate your estimated reward -- the range of the possible move. Is this move expected to go to the bottom band or bounce off the SMA?

3: calculated reward/risk ratio (RRR)

4: if this set-up has a high probability of winning (greater than 50/50) then a RRR of 1 or slightly less than, suggests taking the trade. If the probability of the trade is 50/50 or lower, you need a RRR greater than one to take the trade.

It is not enough to know just how far you think the move can go -- in my opinion, you need to know the rest of the information before putting on the trade.

I know daytraders who routinely take trades with a RRR much less than 1 -- but they are right 70% of the time or more. So in the long run they have a positive expectancy

regards/greg

 

Babak,

If we ever have another bubble, I will go up to 3 SDs

 

Babek ---- I believe for intraday trading purposes on 5M charts Alan recommends 13-period BBs (at 2 Std dev) ---- see page 47 of The Master Swing Trader. I use those settings (13 period) myself and find the tightness of the bands almost perfectly suited for ES and NQ. I believe traders should experiment with different BB periods depending on the instrument they're trading and the time frame involved. Shorter time frames generally respond best to shorter BB periods.

 

gh1

Your thoughtful post is appreciated -- especially the four steps you outlined.

Yes, by width I do mean from bottom band to top band.

In the past I’ve – in real simple programming – I was able to work out a RRR method which was calculated by TC2000. It was helpful in choosing stocks, but inexact due to the limitations of the program.

Of course the method was based on daily data. Now I am eyeballing the 5-minute chart, measuring support & resistance levels (which seem to mean more than measuring the BB, which keeps changing/adapting in "width"). Thus, I am able to determine a RRR.

I agree with your method of accessing ahead of the trade how much risk you are taking & what the potential reward is.

As to knowing how far the move will go – at this point I work with three scenarios – to the next band, all the way, moving in the wrong direction. I am hopeful with more experience, I will be become more professional & confident in my appraisals.

(Disclaimer: the following is not intended as promotion, but as clarification.) How serious is this site about this kind of thing?

Do you use the type of devices explained by John Murphy in "Technical Analysis of the Futures Markets"? For example, on page 157 of his 1986 version, he talks about a bullish pennant & says, "The move after the pennant is completed should duplicate the size of the move preceding it."

Or, are these best reserved for trading other than intra-day? If so, can you mention the kinds of things you use for these appraisals?

BTW, who is John?

Thanks for your time.

 

To be able to compare one stock to another the formula normalizes the value by dividing the width by the moving average. here is the formula for Bol. Band Width written for RavenQuote:
((bbupper(Close,20,2,D,,)- bblower(Close,20,2,D,,))/
mov(Close,20,0,D,,))*100
In English it's the distance between the upper and lower bands as a pecentage of the moving average. Plotting the formula on a chart will show that low values often presage large moves.
Since the value ranges will still vary with the volitility of the stock a more sophisticated formula can be written to look for new say 3 month lows in the BBW value for a given stock.
Another way to put the current volitility in the context of a longer time frame is to divide one BBW by another:
((bbupper(Close,20,2,D,,)- bblower(Close,20,2,D,,))/
(bbupper(Close,60,2,D,,)- bblower(Close,60,2,D,,)))
*100
You'll find you have to throw out stocks that made an extreme move due to a takeover which are now quietly trading towards the takeover price.
One of my favorites is Bollinger's %B formula which gives a numerical value as follows:
>100 if above upper band
>0 <100 if between moving avg and upper band
=0 at moving avg
<0 > -100 if between avg and lower band and
<-100 if below lower band
((Close(D,,)- mov(Close,20,0,D,,))/
(bbupper(Close,20,2,D,,)- mov(Close,20,0,D,,)))*100
English: (Close price - mov avg) divided by (upper band - mov avg)
multiply result by 100
Naturally all formulas can be set up for multiple time frames.
Hope these are useful
Bkout

 

tl:

First:
never read Murphy, so i can't comment on his "appraisal".
I don't day trade -- i swing trade, but i believe that what happens technically on a daily basis is the same thing that happens on an intraday basis -- a chart is a chart -- the same patterns and set-ups apply.

How i arrive at, or "appraise" the Reward R is dependent on which trade set-up i am using. I use many set-ups, but as an example, one set-up i use is the retracement in a trend.

After i calculate my risk i use the last swing high as my Reward (expected target -- based on the test of old high). I can now calculate the RRR.

This obviously is not applicable to whatever trading set-up you are using. But let me propose an example that you might come across:

let's say you are shorting an upper BB tag, and the stock is in an up trend. I would say that the SMA is your expected price target.

However if the stock is in a trading range (trendless) then shorting a tag of the upper BB could have the lower BB as your expected target.

I think you get the point, "appraisals" are set-up dependent.


Second:
John Bollinger is the John i was refering to -- sorry about the incomplete reference. If you trade BB's you would probably do well to read his book.

Also you might do a search on this site for posts by HOYLER -- he recently outlined a trade using the BB's

regards/greg

 

Kicking,

I find it amusing how a short time ago you were seeking advice on TA, and now have tendered an opinion rather harshly based the validity of S/R in conjunction with BB's. Perhaps you would be served to get an education on the intricacies of the subject matter - as it appears the only bullsh*t is on your shoes.

-Hoyler

 

Friday evening...can't resist...

I have to agree with Kicking on this one. I've never heard a BB rule of thumb that didn't resolve to useless info like "if price is going higher, then it's going higher" (riding a band), or "if price is in a narrow range, then it's consolidating" (narrowing of bands), or "if price is really going up fast, then expect a pullback" (piercing a band), or "sometimes prices stay within a range" (BBs as S/R). Sheesh.

 

Hoyler,

I hope the BB used to trade a "BB channel" work for you, that's all I can say. I am curious to see the results when you backtest this strategy. It all comes down to what you are comfortable with, I 'll never trade this way because I am sure there are better risk/reward trades. First where do you place your stop? On some setups you can have a 20-30 cents stop and a 2 point profit objective, this is the kind of risk/reward I look for. You can't do that with this BB strategy. So I use them as what I think they are, only one piece of the puzzle. Also sorry but, I know my TA my question was about TA of the futures I thought I could get some insight from emini traders here, being a novice in the futures arena.