Have you looked at past data at all or is this just a guess? Just bring up any historical price data and you will see moves that went not only 2SDs but some of 5, 6 or even 20. That is only because the bands adjust to large moves by expanding significantly. Your initial trade of entering on a piercing of the BB would be massively underwater, even though the price might 5 days later be within the BB. You are mistaking 3SDs from a specific point, with 3SDs from a constantly changing point. Unfortunately we cannot change our initial entry point each day when the move keeps going further than expected. SDs must be measured from a *static* point, not a moving one. Your observation is a tautology, with no practical implications for actual trading.
I never said I entered at a specific point above BB's. You're taking what I say out of context. Yes, just because it goes outside the bollinger band doesn't mean I should automatically short it. That would be foolish. I've back tested my ideas and there are optimal points of going short when prices are outside the Bollinger Band. Bubbles haven't run 5, 6 or 20 SD's up. The Crah of '87 and other exceptions to the rule are few and far between. It's not guess work, you can look at the data. I'm not suprised with those who agree or disagree about my theories. It's to be expected.
This is the introduction which delimits the purpose of the article: Introduction The purpose of this article is to introduce statistical concepts useful as decision tools. We will mostly focus on methodological aspects as what has been learned at school cannot be applied adhoc since it is pure mathematics where premisces are often if not always supposed to be ideal - for example independancy and normal law - whereas in real life they are not automatically fullfilled. Moreover these methods are mostly dedicated to physical science in laboratory context where parameters can be controlled: what if one wants to apply them in industrial context where such control is not possible ? Walter Shewart engineer and statistician at Bell Laboratories has been the famous theorician for statistical process control applied to economic business. Deming, his spiritual son, has proved the value of his theory in practice since he is responsible for the fantastic quality progress of Japan after wolrd war II. So one could inspire from that sucessful experience which has been in fact used also in service. We don't mean to transpose all the ISO norms about Quality Control, we prefer to use the original thought of Walter Shewart and Deming to build a specific approach to trading field from stock market modelling to trading system building.
On the origin of patterns according to legendary Richard Wyckoff : he doesn't mention that it is due to psychology of crowd ... and you know what my model (see http://www.elitetrader.com/vb/showthread.php?threadid=24706) could be viewed as a QUANTIFICATION of what he calls "the 'composite operator' theory, which stated that large pools work to manipulate the price of stocks, leaving definite footprints behind on the chart in patterns of accumulation and distribution" https://www.lbrgroup.com/index.asp?..._Futures_patter 'Starting with a pattern' February 1999 - excerpt Richard Wyckoff was a trader and market analyst who was active in the market around the turn of the 20th century, about the same time as Charles Dow was writing for the Wall Street Journal. As a trader who was curious about the market, he arrived at a methodology that concentrated on price and volume analysis, point and figure charting, and a comparison between related markets and indexes. He wrote several books about the market, including the famous 'Rollo Tape,' a book about the subject of tape reading written under an assumed name. His writings were later compiled into a comprehensive stock market training course, which is still offered today. Wyckoff postulated the 'composite operator' theory, which stated that large pools work to manipulate the price of stocks, leaving definite footprints behind on the chart in patterns of accumulation and distribution. Wyckoff also believed in the theory of 'cause and effect' whereby the market would build up of supply or demand within a trading range.
Why Walter Shewart ? Because he is a REALISTIC statistician because he has worked in REAL WORLD INDUSTRIES "Normal distributions are not the norm." http://www.elitetrader.com/vb/showthread.php?s=&threadid=25943 http://www.pyzdek.com/non-normal.htm Non-Normal Distributions in the Real World "After nearly two decades of research involving thousands of real-world manufacturing and nonmanufacturing operations, I have an announcement to make: Normal distributions are not the norm. You can easily prove this by collecting data from live processes and evaluating it with an open mind. <font color=green>In fact, the early quality pioneers (such as Walter A. Shewhart) were fully aware of the scarcity of normally distributed data</font>. Today, the prevailing wisdom seems to say, âIf it ainât normal, somethingâs wrong.â Thatâs just not so."