The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. This Week learn all about Bollinger Bands (for a free 2-week trial CLICK HERE)
Bollinger Bands ®
Bollinger Bands ® are a popular indicator developed by John Bollinger in the 1980’s. You will often hear mention of price bands or envelope bands. That is what the Bollinger Bands® are. Bollinger Bands® are derived by taking a simple 20-day moving average and adding a number to get a top band and subtracting a number to get a bottom band.
The “number” is 2 standard deviations added to the moving average for the top band and subtracted from the moving average for the bottom band. The way standard deviations work is that 95% of the time, price will fall within 2 standard deviations of a move, which means that when price trades above 2 standard deviations, it will likely come back quickly. In other words, it is overbought.
It is also a measure of volatility. When the market takes price too far too fast, the Bollinger Bands® alerts us to that fact. It keeps us from buying highs and selling lows. A 20-day period is optimal for calculating Bollinger Bands. It is descriptive of the intermediate-term trend and has achieved wide acceptance. The short-term trend seems well served by the 10-day calculations and the long-term trend by 50-day calculations. What about using Fibonacci averages like 8, 21 and 55? Sound familiar? Test it out on your preferred markets!
The average that is selected should be descriptive of the chosen time frame. This will almost always be different average lengths than the one that proves most useful for crossover buys and sells. The easiest way to identify the proper average is to choose one that provides support to the correction of the first move up off a bottom. If the average is penetrated by the correction, then the average is too short. If, in turn, the correction falls short of the average, then the average is too long. An average that is correctly chosen will provide support far more often than it is broken.
USING THE TOOL
This content is restricted to site members. If you are an existing user, please log in. New users may register below for FREE.