I recently updated Incredible Charts’ Bollinger Bands page to highlight two great trading strategies:
First, if you are not familiar with Bollinger Bands here is a quick summary of basic Bollinger Band trading signals.
Bollinger Band Squeezes
The traditional way of trading the Bollinger Band squeeze is on breakout above (or below) the bands after a squeeze. Now Microsoft had been trending upward since 2012 and another advance was likely. It is important to guard against fake signals in the opposite direction, like the one highlighted in mid-September 2016.
- Green arrow = Long entry
- Red arrow = Exit
- The red candle on Friday, September 9th closed below the lower band after a narrow Bollinger squeeze, signaling a downward break, before a large engulfing candle on Monday warned of reversal to an up-trend. The primary trend would alert traders to treat shorter-term bear signals with caution but it is also advisable to use Twiggs Money Flow to confirm buying or selling pressure. Here 21-day Twiggs Money Flow is oscillating above zero, indicating buying pressure despite the downward breakout. So the trade would be ignored.
- Subsequent rising troughs on Twiggs Money Flow would give me sufficient confidence to enter the trade [green arrow] before the next breakout, with a stop below the recent low at $56. More cautious traders would wait for breakout above the upper Bollinger Band but this often gives a wider risk margin because the stop should still be set below $56. The subsequent pull-back to test support in November 2016 underlines the need not to set stops at the breakout level.
- Exit [red arrow] on bearish divergence on Twiggs Money Flow, when the second dip crosses below zero, or if price closes below the lower Bollinger Band.
Bollinger Band Trends
The second strategy is a trend-following strategy I picked up from Nick Radge’s book Unholy Grails, where he uses 100-day Bollinger Bands to capture trend momentum. The rules are simple:
- Enter when price closes above the upper Bollinger Band
- Exit when price closes below the lower Bollinger Band
Nick proposes setting the upper band at 3 standard deviations and the lower band at 1 standard deviation but I am wary of this (too much like curve-fitting) and would stick to bands at 2 standard deviations.
Here I have plotted Microsoft with 100-day Bollinger Bands at 2 standard deviations and 13-week Twiggs Money Flow to highlight long-term buying and selling pressure.
For a detailed discussion of trading signals for this chart, go to Bollinger Band Trends.
Rob Booker discusses the importance of focusing on what really works [at 3:30]
Coach Kevin Kelley would make a great share trader/momentum investor. He questions the accepted norms, analyzes the data and plays the percentages, instead of following the herd.
Coach Kevin Kelley of Pulaski Academy in Little Rock, Arkansas, instructs his players to never punt, never field punts, and only do onside kicks, and he claims that math backs up his innovative philosophy. Grantland spent some time with Kelley and his players to learn more about the coach behind the team that once scored 29 points before its opponent touched the ball.
Hat tip to Barry Ritholz
Risk specialist John Breit cites this immutable law of capital markets:
You can’t make money without taking risk.
Breit reminds us that if a trade seems both profitable and low-risk, it’s because you don’t understand the risks.
From Why Risk Managers Should Be Spymasters | Jesse Eisinger | Pro Publica
Linette Lopez writes:
Nanex, a Chicago-based market research firm, sent us a chart that illustrates what can stand in a trader’s way when they’re trying to quote the right price……
“It happens all the time,” [Nanex CEO Eric] Hunsader told Business Insider. “It crowds out legitimate prices… it’s like SPAM. Maybe one of these guys is a legit offer but there’s no way of knowing.”
View chart at High Frequency Trading Fake Quotes – Business Insider.
NATHANIEL POPPER and CHRISTOPHER LEONARD write:
The chief economist at the Commodity Futures Trading Commission, Andrei Kirilenko, reports in a coming study that high-frequency traders make an average profit of as much as $5.05 each time they go up against small traders buying and selling one of the most widely used financial contracts [E-mini S&P 500 Futures].
via High-Speed Traders Profit at Expense of Ordinary Investors, a Study Says – NYTimes.com.
John Carney writes that high frequency trading is an unintended consequence of regulatory action to remove market specialists:
High frequency trading grew up in the aftermath of a decades-long struggle by Congress, the SEC, and the stock exchanges to stamp out the specialists, who were accused of front-running customers, favoritism and interfering with the smooth operations of markets…….. Things really came to a head after the dot-com crash, when everyone was looking for someone to blame for all that money lost. By 2005, the government passed a series of market reforms that were aimed directly at eliminating the specialists. In the wake of those reforms, commissions fell, pricing improved, exchanges became more competitive—and high-frequency trading arose.
Seems they have swapped one set of problems for another.
The safest way for retail investors or traders to minimize the cost of HFT market interference may be to participate in opening or closing auctions where bids are matched by algorithm.
via How Regulations Led to High-Frequency Trading.
Extract from a paper by Tom McDonald at the Australian Risk Policy Institute (ARPI), as quoted by Sell On News at Macrobusiness.com.au:
The principal purpose of capital markets is to facilitate the efficient allocation of capital across industries, and by extension, society, and via efficient means of allocation, create financing options to facilitate consumption and future additional wealth creation. Capital markets are unique but constitute the lifeblood of capitalism and thereby promote national growth, opportunity, peace, order, good government and individual welfare.
That said, the risks inherent in capital markets are like no other. Ultimately, when these risks manifest, they can destroy national economies (Iceland), even the world economy, wreak famine and the total collapse of ordered society. Accordingly, any development that carries uncertainty or intrinsic risk must be scrutinised, understood and dealt with to protect the whole.
Put in the bluntest way, HFT is parasitic in relation to capital markets. It adds little or no value and it creates friction, as opposed to greater liquidity. It can also dislocate or render markets unusable. Most importantly, it operates within an environment alien to the underlying structure that underpins markets. In fact, it operates generically across different market platforms so that in a worst case scenario, automated decisions may dislocate multiple markets at the same time.
via How politicians failed us | | MacroBusiness.
By Laton McCartney
Members of the European Parliament tightened up the EU’s proposal on high-frequency algorithmic trading, voting that all high-frequency trading orders should be valid for one half second. The rule means orders cannot be cancelled or modified for at least five hundred milliseconds………All firms and trading venues also would have to ensure that trading systems are resilient and prepared to deal with sudden increases in order flows or market stresses. These could include Europe’s own “circuit breakers” to suspend trading………
via EU: Trades Must Live for Second | Securities Technology Monitor.
By John Kemp
ANATOMY OF A FLASH CRASH
In their report on the 2010 equity market crash, the SEC and CFTC staff found that “against a backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position”.
“This large fundamental trader chose to execute this sell program via an automated execution algorithm (“Sell Algorithm”) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time,” the report noted. “On May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes”…………..
via When Oil Prices Drop in a ‘Flash’: Is It Real?.