Thanks very much, Mr. J_bond for that reference. I was certain someone, likely many, had studied price distributions, just didn't know who, and a little too lazy to research it myself. Thanks again. This thread has been enlightening.
An alternative to BB's would be to use a three moving average system. I'm experimenting with a 13 SMA, then a 21 SMA (high) and 21 SMA (low).. Price is overbought when above 21 high, oversold when below, then the 13 sma gives a buy/ short signal when it crosses one or more of the lines. A good thing about this method is that the two 21 MA's are always equal distance apart, so you get smooth curves and not something so random like bb's. I use 13 and 21 because they're fib numbers but most people would probably use a 10/20 set up. cm69
I put it on a chart using EMAs using 20 high and 20 low. You could just automate a system where you go long when the middle (10 EMA) breaks out of the high/low channel and use the opposite channel line as an initial stop with the channel line on the side of the trade as a trailing stop if it moves in the right direction Just off the top of my head.. EDIT: You could also go long, for example, if the price on a 5-minute chart for YM moves from below the lower line to above the upper line. Short is the opposite.
OPTIONCOACH, Looks like it works nicely. Do you wait for an expansion bar as your cue? <img src="http://mysite.verizon.net/vzepr9fe/sitebuildercontent/sitebuilderpictures/am-2.jpg">
Yes. The price may peek into the upper channel but I want it to CLOSE up into the channel on a breakout for me to go long or short and then you see how it runs in between the 2 channels. I see this on the indexes mostly where it drops, for example, and then after a some nice long drops it moves sideways and then moves out of the sideway consolidation out of the channel upwards. Good indication of trend reversal for the short-term. Now when the market breaks out of the consolidation and jumps into the upper or lower channel, 2 things happen usually (lets assume it is a breakout lower). 1. The stock pulls back within 1 or 2 bars on a 5 minute chart for example, back to the 1 stdev BB line and continues the move lower. This not only gives you confirmation but also gives you a second exit should you miss the breakout. Simply wait for another bar or two after the breakout and go short in this example at the 1 stedev BB band with a stop above the middle of the channel. Nice tight stop with good entry. 2. The stock drops for a few bars and then pulls back to 20 or 40 EMA moving support. This is important to remember. If the breakout lower is strong, at some point it will pullback to MA resistance and this is not a trend reversal per se. You can go short again at the MA resistance with a tight stop on a close above the MAs or use the MAs as a trailing stop. This works great on a super diving breakout. The market usually avoids such a pullback and the 20 or 40 day MA is a great trailing stop keeping you in the trade. The 1 stdev BB is also a good trailing stop to exit half the position.
Here is another great example from ES on 2/7: 1. During lunch hour market stays in range as bands go sideways. 2. At about 1:35 PM or so market moves lower and then is followed by another red candle at around 1:40 which moves into the lower channel with the bands expanding. You could go short at the close of the second bar in the channel with a stop on a close above the middle line (dotted line). 3. The next bar shows the market dip a little more and then pull back to the 1BB line as well as the 20 EMA (red) and 40 ema (blue). The market continues to bounce off the upper channel line and MA resistance allowing you to enter if you missed it or keep you in the trade with your stop. 4. At 2:00 PM or so we finally get the market puke and the ES dives. 5. Market has a pullback which dies at the upper channel BB line and bounces off and then dives hard again. 6. If you use the red MA (20 EMA) as a trailing stop and the upper channel as a half trailing stop you stay in the trade for 3 points or so. 7. You can take half off when the ES moves out of the channel at around 3:15 PM or so. Notice that after that it hits the 20 EMA and bounces off keeping you in the trade. 8. A few bars later it never re-enters the lower channel confirming the trend is over and when it closes above the middle line you can close the rest. Not all are as neat and pretty as this but if you wait for big breakouts you can ride them for a few points with tight stops. ER2 seems to work in a similar way as well as YM. Daily charts are even better for more conservative investors. LOOK at GOOG and drool at the entries. LOOK AT GOOG IN SEPT 2007. Using the 20 EMA as a trailing stop would have gotten you in on the breakout into the upper channel at $390 and ket you in all the way to $480. Stocks you need to give more room and they pop in and out of the channel on a breakout so use the MAs for trailing resistance.
OPTIONSCOPE, <I> . . . price may peek into the upper channel but I want it to CLOSE up into the channel on a breakout for me to go long or short and then you see how it runs in between the 2 channels. </I> I understand: a range expansion with a close in the channel. <I> I see this on the indexes mostly where it drops, for example, and then after a some nice long drops it moves sideways and then moves out of the sideway consolidation out of the channel upwards. <b> Good indication of trend reversal for the short-term. </b> </I> <I> 1. The stock pulls back within 1 or 2 bars on a 5 minute chart for example, back to the 1 stdev BB line and continues the move lower. This not only gives you confirmation but also gives you a second exit should you miss the breakout. </i> A second entry, no? A second entry at the test? <I> Simply wait for another bar or two after the breakout and go short in this example at the 1 stedev BB band with a stop above the middle of the channel. Nice tight stop with good entry. </I> My inclination would be to give it a little more room, but thatâs not to contradict you. Youâve seen the set up more often than I. <I> 2. The stock drops for a few bars and then pulls back to 20 or 40 EMA moving support. This is important to remember. If the breakout lower is strong, at some point it will pullback to MA resistance and this is not a trend reversal per se. You can go short again at the MA resistance with a tight stop on a close above the MAs or use the MAs as a trailing stop. This works great on a super diving breakout. The market usually avoids such a pullback and the 20 or 40 day MA is a great trailing stop keeping you in the trade. The 1 stdev BB is also a good trailing stop to exit half the position. </I> Iâm more into the standard error bands as a trailing stop, but hey, youâve been generous in explaining all of this so carefully. I particularly like the channel idea because itâs a nice conceptual aid. I guess one could also identify the set up and then place a resting order at so-and-so-many ATRs away from the price action â and just get oneself stopped in. Do you ever do that? Although that wouldnât always fill your CLOSE > (or <) than the channel line. You wrote: <I> I want it to CLOSE up into the channel on a breakout</I>. But that doesnât necessarily mean a close greater than the 3 sigma line, right? Just up into the channel between the 1-sigma and the 3-sigma, with the expansion. Any thoughts on volume? I have'nt taken a close look at you ES on 2/7 image yet. Maybe early tomorrow or late p.m. today.
1. Yes I meant second ENTRY, not second exit when after the breakout occurs, the market pulls back to the 1BB channel line. Sorry about that. 2. If a breakout occurs to the downside, for example, and it is a strong directional move, it should not move back to the center line or really close above it. I would say that in most cases if it does so, the breakout was a false one and getting out is a good idea. Therefore, that is why I say that when you jump in on the breakout, a stop at a close above the middle line is a logical place for the stop but not the only place. So if you wish to give it more room for wiggle, then that is fine as long as it is logical (calling Mr. Spock). 3. I am looking for a close above the 1BB band into the channel for a trend beginning indicator. I say a CLOSE, because it is not uncommon for the market to move up into the channel and then pull back to the middle. The BBs I have update on each tick so they may expand on the initial move and then flatten as the market moves back to the middle. To avoid getting suckered into the initial fake (which happens a lot in the 12:00 to 2:00 area where it dips and jumps and pulls back), I want a close into the channel. Also, the move into the channel should be on a decent size candle on a candlestick chart. This shows more strength then if it pops into the channel on a doji. Also a volume spike adds more credibility. Finally the one exception to waiting for the close is if the market starts diving fast or jumping up fast. You will know it when you see it and you can just jump in on the move. It will usually keep running or pullback. If you missed it you can still wait for the close and scalp some more on the move but you might have missed a chunk of it. If the move is really strong it will probably not pull back to the 1 BB band and thus no second chance for entry. Therefore, if you see a nice long candle forming into the channel you can go in. To see what I mean look at a Pound future chart from today using 5 minute time frame and see what happened at 4:35 AM. Gap down into channel and price diving. No need to wait for a close since the signal is clear. Even if you waited for the close you can see the market still dropped another 30 - 40 pips. I have been working on this only since last summer so I have not traded it extensively but I am always studying the charts to gain a familiarity with the patterns. Also on todays Pound Fx futures chart look at 8:00 AM for a breakout which moved nicely initially and then sputtered. You coudl have scalped 30 pips or so but you will see that the market started sliding back to the 1 BB, barely bounced off and then dropped more to the EMAs and moved right through. One way to deal with this is scale out of a portion of the position after a large move and set the stop to near your entry so if it eventually deteriorates, you still have a profit.