Hi All, Had a question about trading volatility breakouts based on the bandwidth of bollinger bands (BBW). I'm trading intra-day equities. I'm using the the squeeze method for trading when the bands become really narrow (consolidation). (http://www.bollingeronbollingerbands.com/methods/ - method I) It seems to work good, only problem is I don't know which direction to take a position in before the move begins - it's a 50/50 hit/miss situation. Are there any indicators/methods that will give me a higher probability of choosing the right direction of the breakout? Also, in trading this strategy there seem to be a lot of head fakes - is there a way to minimize that or is taking a small loss and reversing direction the only way? Thank you.
You don't take a position until you see the breakout. Then you move in the direction of the breakout. Now you say there are lots of fakemoves, that statement is a clear contradiction of your previous statement, that the strategy works well. It either works well, or it has bunch of fake moves. You can't reconcile those two...If you can, you already has a solution...
I too use the squeeze and head fakes do happen. For a detailed description of the squeeze and trading on it, look at John Carter's new book. He devotes a whole chapter to it. It is a fine publication and covers many setups. Good trading
Yes, "bracket" the breakout area BEYOND the 80% of head fakes (backtested data) range. You should have 2 ranges backtested and selected to start this method; 1) A specifically defined bollinger band range (tighter congestion areas) from which you would be allowed to take a breakout trade from. 2) A second wider range (80% of false breakout range) determined from all head fakes beyond your previously determined range, that will encompass at least 80% of all head fake price movements from the past (3 years to 5 years). Now build breakout "bracket" entries at the price levels just beyond your second wider false breakout range...a few ticks at most. Most work spent with this method is in your definition (BB numerical value) of a congestion area that will qualify for the ability to enter a breakout trade from. Some products work extremely well for this type of trade....now go find them.
....and yes there is one directional indicator that helps a bit, but who needs an indicator when you have a bracket entry capability.
See if volume follows the breakout, especially large block orders. Expecting to pick the correct direction consistently and enter at the border of the breakout zone on the initial movement is not realistic. That's like consistently nailing tops and bottoms on reversals. Retracements/bounces back to the consolidation area can make for a safer entry after the direction of the break has been established. The downside to that strategy is missing those breaks that just run away and don't look back. That said, I personally find breakouts very hard to do well.
I have been tinkering with BB. I have found that by themselves they aren't too reliable, but when combined with a reversal signal on a candlestick or bar chart they become much stronger.