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AlphaCenturion (42.25)

The Redheaded Stepchild of Technical Indicators

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September 01, 2010 – Comments (4) | RELATED TICKERS: AAPL , NFLX , AMZN

So I figured I would start off my first blog post with a discussion of something that really doesn't apply to me or my personal investing behavior and that is the art of technical analysis.  While I'm not an active trader and thus don't engage much in technical analysis, I personally believe that technicals are a legitimate trading strategy and often times are actually MORE relevant than fundamentals (how many times have you watched a great company with awesome fundamentals keep falling and falling and falling?).  Having said that, I've noticed that whenever technical indicators are mentioned in the media whether it's on CNBC or The Motley Fool, the one indicator that almost never gets mentioned are Bollinger Bands.  All the time you hear people talk about moving averages, MACD, RSI, DMI, but nobody ever talks about Bollinger Bands.  Why is this the case?  Bollinger Bands to me are the single best indicator when it comes to judging momentum, volatility, and potential future price movements, plus they're so easy to use! 

Couple reasons why Bollinger Bands are superior:

1) They reveal just enough information without being too complicated 

As mentioned above, Bollinger Bands reveal clues about a stock's momentum, volatility, and price direction, all in one slick chart that's no more difficult to read or analyze than a single SMA line.

2) They react quickly to changing market conditions

Unlike most lagging indicators that only give you information about where a stock has been, Bollinger Bands do a great job of telling you where a stock currently IS.  Additionally, while many technical patterns fall apart whenever there's a shock, Bollinger Bands recognizes the significance of extreme price volatility and even incorporates it as a central theme in its analysis.

 3) They're incredibly versatile

Bollinger Bands are adjustable for every individual stock and countless trading methods can be devised from a single set of bands.  This is probably the same reason why they're rarely ever mentioned since there doesn't exist a standard set of rules that can be applied to Bollinger Bands in order to make buy or sell decisions.  You're free to draw your own conclusions and pick up new strategies along the way.

 

Conclusion:

Obviously, TA is not a perfect science and no one technical indicator alone can reveal much about a stock's future price patterns.  However, I find that Bollinger Bands in conjunction with external confirmation usually does an amazing job of clearing up price uncertainty.  Even when utilized alone I feel that Bollinger Bands can tell you more about a stock in one split second than just about any other technical indicator.  

 

4 Comments – Post Your Own

#1) On September 01, 2010 at 10:13 PM, StockMillionare (< 20) wrote:

My 2 cents, or 1 cent n 1 cent=2 cents, no matter.  The Great Bollinger Bands are used to determine the volatility of a stock, a future and any other instrument that you may want to trade. It consists of a simple moving average and then an upper and lower band calculated by using a 2 standard deviation from the moving average.

During high volatility the bands expands. During low volatility the bands contract which tells us a substantial move will occur. The problem with Bollinger Bands is that it doesn’t predict which way the move will be, only that there will be a move.

Because the bands will contain most of the price action, a move to the upper band will be seen as overbought and vice versa.

And 2 me, well not prediction which way the move will go does me no good, unless your trading an options straddle.

Here are some of my favorite tech indicators, or at least what I've found to be effective.

1. Price - I personally think price action ( I use japanese candle patterns) along with moving average and support and resistance. I try to go with the trend and identify the path of least resistance is where I want to be.

2. Volume - One of the best indicators of the conviction of traders. Volume ,placed in context with price movement, allows me to trade effectively. To measure the significance of volume, we need a baseline. What I am looking for is the % change over an average day.

3. Support and Resistance - I use support and resistance for entries and exits, as well as for clues about where the market is going. But support and resistance trading never becomes obsolete, because support and resistance levels are caused by human nature. They are a natural occurrence in all liquid markets, they always have been and they always will be.

4. Moving Averages - Moving averages are one tool to help you detect a change in trend. They measure buying and selling pressures under the assumption that no commodity can sustain an uptrend or downtrend without consistent buying and selling pressure.

5. Market Internals - For me the internals can help to show direction but what is important is to see how the internals are acting at key price levels. They will help you to confirm rejection or acceptance at support/resistance. Breadth can be used to see underlying strength or weakness. The up/down volume seems to give a broad sense of the market.

So that is my bread in butter when it comes to tech factors, but hey to each there own, this is stockmillionare signing off!

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#2) On September 01, 2010 at 10:47 PM, AlphaCenturion (42.25) wrote:

Thanks stockmillionaire for expanding on the mechanics of bollinger bands and how they work.  I'll have to disagree with you though on their inability to predict future price movements.  Like I said before, there are no set rules for trading with bollinger bands so therefore you must formulate your own methods.  Personally, before buying any stock I usually check the charts to see how wide the bands are.  If the bands have diverged that means there's been a shock and you'll most likely be subject to significant short-term volatility.  High or low, it's always better to buy at a stable price than one that is fluctuating wildly.  Another general rule I've observed is that buying at the bottom of the lower band during periods of low volatility usually gives you the best chance of experiencing a bounce.  If you couple that with an oversold RSI then you can probably catch the proverbial falling knife at least 60% of the time.  For example, I started a position in BBY in mid-July when the stock was at $34.  As you can observe the bands had narrowed and it was trading in the bottom range.  Within a span of a few days the stock spiked up roughly 8% to $37.  Of course, I didn't sell at the time because my plan was to hold longer-term and so the stock dropped back down, but you can see how it did an excellent job at predicting an initial entry point.  

 

-Alpha 

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#3) On September 01, 2010 at 10:47 PM, AlphaCenturion (42.25) wrote:

Thanks stockmillionaire for expanding on the mechanics of bollinger bands and how they work.  I'll have to disagree with you though on their inability to predict future price movements.  Like I said before, there are no set rules for trading with bollinger bands so therefore you must formulate your own methods.  Personally, before buying any stock I usually check the charts to see how wide the bands are.  If the bands have diverged that means there's been a shock and you'll most likely be subject to significant short-term volatility.  High or low, it's always better to buy at a stable price than one that is fluctuating wildly.  Another general rule I've observed is that buying at the bottom of the lower band during periods of low volatility usually gives you the best chance of experiencing a bounce.  If you couple that with an oversold RSI then you can probably catch the proverbial falling knife at least 60% of the time.  For example, I started a position in BBY in mid-July when the stock was at $34.  As you can observe the bands had narrowed and it was trading in the bottom range.  Within a span of a few days the stock spiked up roughly 8% to $37.  Of course, I didn't sell at the time because my plan was to hold longer-term and so the stock dropped back down, but you can see how it did an excellent job at predicting an initial entry point.  

 

-Alpha 

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#4) On September 03, 2010 at 1:46 AM, StockMillionare (< 20) wrote:

Good points my friend.  I have found that I can more accuractly get sweet moves in stocks with other tech indicators that I mentioned above.  I believe the only way to tell 4 sure iz to test it.  So I think the best way to test it is to find 10 or more stocks using the bands and c how well the predictions pan out.  Also pick ten picks based on other known tech factors and compare that way.  Over time test after test you'll have your anwsers.  All we need is a time frame to test the theory, this is stockmillionare signing off!

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