Bollinger Band Breakout through Support Potential Sell Signal.
Using Bollinger Bands to detect a period of low volatility that moves to higher volatility, this system attempts to capture the resulting trend. This system is called Method 1 or the Volatility Breakout System in John Bollinger's book, Bollinger on Bollinger Bands. A Squeeze is triggered when volatility reaches a six-month low and is identified when Bollinger Bands® reach a six-month minimum distance apart. Determining Breakout Direction The next step, deciding which way stocks will go once they break out, is somewhat more challenging.
Divide the amount to be risked by the value of the movement to the stop, round down to a whole amount available for a position and you'll have your position size. With this position sizing, you limit your risk if the trade goes against you so you can cut your losses short and let your profits run.
Parabolic SAR would follow the price and exit quicker or to keep from exiting too early, exit when the price reaches the middle moving average, the opposite band or between the two. As the price movement slows at the end of the trend, the bands will tighten and a tag of the opposite band may not give back too much profit but also not exit the position before the trend is over.
In the case of a headfake or whipsaw at the beginning, have criteria that allows for reentry as the trend continues even if it follows the opposite band that it initially crosses. Depending on your timeframe and the desired volatility levels, you can use the standard Bollinger Band parameters of 2 standard deviations of a 20 period average or you can use a 1. The system is also found at John's site including his views on dealing with the head fake and finding out that Bruce Babcock had this trading approach as one of his favorites.
Buy a compiled version of this system on the MQL Market. Buy the full code for this system at www. Our Trend Following websites: When the bands come close together, constricting the moving average, it is called a squeeze. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities.
Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade. However, these conditions are not trading signals. The bands give no indication when the change may take place or which direction price could move. Technical analysis incorporates this technical indicator and many others to create actionable trading plans and strategies.
If you want to learn how to do this yourself for your own trading future, check out Investopedia Academy's Technical Analysis Course. Any breakout above or below the bands is a major event. The breakout is not a trading signal. The mistake most people make is believing that that price hitting or exceeding one of the bands is a signal to buy or sell. Breakouts provide no clue as to the direction and extent of future price movement. They are simply one indicator designed to provide traders with information regarding price volatility.
John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals. He believes it is crucial to use indicators based on different types of data.
This strategy has become one of the most useful tools for spotlighting extreme short-term price moves. Learn to pounce on the opportunity that arises when other traders run and hide.
The price then starts increasing. If the price touches a band and head fakes to the other band, you'll get a whipsaw and need to enter the new direction.
Middle of the Bands.