2 Great Bollinger Band Trading Strategies

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.

Microsoft Bollinger Band Squeeze with Twiggs Money Flow

  • 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.

Microsoft Bollinger Band Trends

For a detailed discussion of trading signals for this chart, go to Bollinger Band Trends.

Europe: DAX and Footsie buying pressure

Germany’s DAX is headed for a test of resistance at the 2012 high of 7200. A trough above zero on 13-week Twiggs Money Flow indicates strong buying pressure. We should see stubborn resistance at 7200 but also strong support at 6500 if there is a retracement.

DAX Index

The FTSE 100 is testing resistance at 5700 while 21-day Twiggs Money Flow bottoming above zero indicates (medium-term) buying pressure. Breakout would offer a target of 5900*.

FTSE 100 Index

* Target calculation: 5700 + ( 5700 – 5500 ) = 5900

Hong Kong, India and Singapore

Dow Jones Hong Kong Index is headed for primary support at 360. Failure would confirm the primary down-trend signaled by 63-day Twiggs Momentum below zero.

Straits Times Index

India’s Sensex is testing support at 16000/15800. Failure would mean another test of primary support at 15000/15200. Reversal of 13-week Twiggs Money Flow below zero indicates selling pressure. Failure of primary support would offer a target of 12000*.

BSE Sensex Index

* Target calculation: 15 – ( 18 − 15 ) = 12

Dow Jones Singapore Index broke medium-term support at 222, indicating a test of primary support at 208/210. Reversal of 13-week Twiggs Money Flow below zero indicates selling pressure. Failure of primary support would offer a target of 190*.

Straits Times Index

* Target calculation: 210 – ( 230 − 210 ) = 190

India & Singapore

The BSE Sensex found medium-term support at 16000/15800 but reversal of 13-week Twiggs Money Flow below zero warns of further selling pressure. Expect another test of primary support at 15000/15200. Failure would offer a target of 12000*.

BSE Sensex Index

* Target calculation: 15 – ( 18 − 15 ) = 12

With almost half of foreign bank funding sourced from Europe, India is experiencing significant tightening of external finance and hence domestic investment.

Singapore’s Straits Times Index is testing medium-term support at 2750. Failure would test primary support at 2600. Reversal of 63-day Twiggs Momentum below zero warns of a strong primary down-trend. Recovery above 2900 is unlikely but would indicate continuation of the primary up-trend.

Straits Times Index

* Target calculation: 2600 – ( 2900 − 2600 ) = 2300

Canada: TSX 60 and potential breakouts

The TSX 60 index is consolidating in a narrow band between 700 and 715. Upward breakout is likely and would signal a primary up-trend. Recovery of 63-day Twiggs Momentum above zero would strengthen the signal. Target for the initial advance is 790.

TSX 60 Index

* Target calculation: 720 + ( 720 – 650 ) = 790

A screen of stocks with low Momentum but high buying pressure, as indicated by 21-day Twiggs Money Flow, reveals a list of 93 potential breakouts (after filtering out stocks with daily Value/Turnover traded of less than $1 million). Husky Energy [HSE], Crew Energy [CR] and Bank of Nova Scotia [BNS] are three that look interesting.

Asia-Pacific: ASX 200 and DJ South Korea tank

Australia’s ASX 200 index fell sharply Monday. Bearish divergence on 13-week Twiggs Money Flow warns of strong selling pressure. Failure of medium-term support at 4000 is likely, while breach of the primary level at 3850 would signal a decline to 3350*.

ASX 200 Index

* Target calculation: 3850 – (4350 – 3850 ) = 3350

South Korea shows a similar pattern, with the Dow Jones index testing medium-term support at 380 following bearish divergence on 13-week Twiggs Money Flow. Breach of primary support at 350 would signal a primary decline to 280*.

DJ South Korea Index

* Target calculation: 350 – ( 420 – 350 ) = 280