How The Pro's Trade Using Bollinger Band Width Technical Analysis


Uploaded by StockMarketStrategy on 19.04.2010

Transcript:
Hi Traders. Philip Thygesen here from Stock-Market-Strategy. Before I start I just want to say that trading
involves risk and hard work. So please do your own due diligence before trading for
real money. Today I am going to talk about Bollinger Band Width. I will give some background
information about Bollinger Band Width and then show you some charts explaining the theory
behind this indicator. Finally I will give some ideas about how to trade using Bollinger
Band Width in conjunction with other indicators and/or chart analysis. If you go to our website
www.stock-market-strategy.com you will find a tab called education, technical analysis
and Bollinger Band Width. Here you will find a written explanation including a chart showing
you how to trade using Bollinger Band Width. This is made to make it easy for you to keep
track of the information. You might print this page out so you can have it in front
of you while writing your trading plan or back testing the ideas shown here. What Bollinger
Band Width Is Telling You Bollinger Band Width is an indicator which is derived from Bollinger
Bands. So if you are interested in knowing more about Bollinger Bands you can go to our
website as well and find a written explanation about Bollinger Bands. Here you will also
find some charts and a video explaining Bollinger Bands. Bollinger Bands measures volatility
by using a 2 standard deviation away from the average. It places two bands, above and
below. The value between these two bands gives the Band Width. You see the Band Width down
here. During high volatility the Bands will widen and thereby making the Band Width rise.
When the Bands contract, the Band Width will drop. When the Band Width is at a very high
reading, like at these 3 situations it can indicate that the trend will be ending soon.
But because the trend is ending soon does not necessary mean the stock will reverse
and go down. It can also just consolidate which we see in these two situations. When
the Band Width is at extreme lows, like at these 2 situations it can indicate that the
price will break out sooner rather than later. The breakout is here and here. Breakout Trade
With Bollinger Band Width So how can we trade this? Well first I identify the trend. I look
at my MA and see that it is up sloping with the price staying relative above it. So the
trend is up. I will only take long plays. Second here is where the Bollinger Band Width
gives us a little bit extra evidence than just the Bollinger Bands. Here we get an extreme
low reading Bollinger Band Width and we can compare it with historical levels over here
and see that this has a lower reading telling us that the Bands have contracted more which
then indicate this breakout can be even stronger than the breakout we saw over here. And third,
the entry. I will be looking for a close above last swing pivot high inside the Bollinger
Band squeeze when the Bollinger Band Width is at a low reading and relative flat. Bollinger
Band Width Combined With RSI Ok. We have seen how to use the Bollinger Band Width when we
have a low reading. But how do we use it if we have a high reading. First and this is
very important you have to identify the right market conditions for this setup. It has to
be what people call a choppy market. You see that the MA is sideways and that the price
is crossing down through and up through. Down again. Up again. Almost like in a random pattern.
Second you look for a high reading in the Band Width and has to be higher than the previous
extreme reading in the Band Width. Third you look for RSI divergence. Price makes a higher
high. RSI makes a lower high. It is especially if this divergence happens above the overbought
line. Fourth the entry signal. I want the bar to close underneath prior 3 bars. And
it happens here. A little late but that's still the signal. Here is a similar trade.
But because it is very important that the right market conditions are there I am going
to show you another example. First look at the MA and see that it is relative flat and
sideways. Also that price is crossing down through the MA. It keeps dropping suddenly
to make a sharp move to the opposite side crossing through the MA. This can be classed
as choppy market. Second look for a extreme high reading in the Band Width compared to
prior highs. Third look for RSI divergence. Price is making a higher high compared to
the old high. RSI down here makes a lower high compared to the old high. And fourth,
the entry. Because we have a well defined double top here I am going to be more aggressive.
I am going to take this second peak as an entry. This bar is a down bar. It engulfed
the prior up bar. So I am being aggressive entering a short here. This ends this video.
I hope you enjoyed it.