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Robert

Question regarding Bollinger Bands

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Linda Raschke uses BB after a trend day when consolidation is expected. She uses it to fade the upper and lower BB and uses the 20EMA as the target. She only takes the first 2 signals in the morning though. The 3rd signal is slightly positive based on her testing. This setup is not used in the afternoon session. In general, she doesn't use BB for her other setups, she uses the Keltner Channel. BB may work better with Options because they are both volatility based.

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Very interesting Antonio. Bollinger Bands are useful when volatility is low. Hubert and John Carter has an custom indictor called the TTM Squeeze which is a combination of bollinger bands and keltner channels. When the bollinger bands are inside the ketlner channel, it gives of a first signal. When the bollinger bands then move out of the ketlner channel the indicator will fire of a squeeze signal in either direction.

 

The concept of this is to capture any breakout moves that occur when volatility rises. I have never used this indicator but the concept does make alot of sense.

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Instead of purchasing the squeeze indicator from Carter and Hubert, I have observed and traded the Bollinger band inside the Keltner channel. It alerts me to a nearing move in the direction of market internals and indicator divergences.

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I compared it to the TTM Squeeze and did notice that it is very similar, but slightly difference. I haven't looked at the code so I don't know what is contributing to that.

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Im going to test it out today. This is good for a trending market or a wide range day, so I will need to devise some setups that I can use with this indicator. Perhaps it is best used to confirm a setup instead of using the squeeze indicator as a first choice.

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Here is the results of the squeeze indicator from today. Keep in mind that today was a pretty rangebound day consolidating between the weekly pivot and the S1 pivot zone. I think it will work better on a trend day. Perhaps it can give an early signal for a trend in play.

092206squeeze.jpg.cb286e633eb6be15f94f4f891e373fef.jpg

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Linda Raschke uses BB after a trend day when consolidation is expected. She uses it to fade the upper and lower BB and uses the 20EMA as the target. She only takes the first 2 signals in the morning though. The 3rd signal is slightly positive based on her testing. This setup is not used in the afternoon session. In general, she doesn't use BB for her other setups, she uses the Keltner Channel. BB may work better with Options because they are both volatility based.

 

Does fading the upper and lower bands only work during a consolidated market. If the markets were in an uptrend, can I expect a pullback to the upper band?

 

I read that once prices expand out of the bollinger bands they have a tendency to return inside the bands. Would this offer a fading opportunity? Also, how would I use the the middle band? Thank you

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Does fading the upper and lower bands only work during a consolidated market. If the markets were in an uptrend, can I expect a pullback to the upper band?

 

I read that once prices expand out of the bollinger bands they have a tendency to return inside the bands. Would this offer a fading opportunity? Also, how would I use the the middle band? Thank you

 

Robert, consolidating markets and trending markets are traded differently! In a trading range, you should fade near the bracket limits (i.e., short the upper limit and go long at the lower limit) and in a trending market you should buy pullbacks and short rallies. Do not fade anymore. No doubt you will lose big bucks fading a trending market. Trading a trending market is a lot easier than trading a consolidating market. When a market is trending just jump on board and then manage the trade. You don't need to use many tools to trade a trending market. Don't complicate this.

 

When a market is in a trading range, you do not want to enter in the middle of the range. There is a lot of noise there and offers poor trade location. From the middle of a range, you really don't know in which direction the market is likely to go. From a Market Profile perspective, the middle of the range would contain the value area and the limits would contain the "unfair" prices. When prices trade in the "unfair" area, it is likely that price will rotate back to value. This is exactly what you said about about markets trading beyond the BBs and then back inside it (until the market breaks out, of course).

 

You can use the middle band of the BBs for your target (according to Linda Raschke), which makes sense to me. So you could short at the upper BB and cover when it reaches the middle band. Keep in mind that prices don't always trade directly from the upper limit to the lower limit and vice versa. Again, the idea is that after range expansion, consolidation is expected and that's when you could employ the BB trading strategy.

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Thank you for the explanation ant. It was extremely helpful. You mentioned not to fade during a trending market; instead buy the pullbacks and short the rallies.

 

I have heard of traders who are counter trend traders. How do they employ their strategy in a trending market? They would basically be fighting the trend? Is counter trending even profitable? New traders are told not to catch a falling knife, yet professional traders seem to find ways to profit from this.

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Perhaps I shouldn't have made such a blanket statement about not fading a trend. I believe a countertrend strategy can be implemented successfully, but probably not by many. An example of a countertrend strategy in a trending market might be to monitor a trend for loss of momentum and then fade the trend, such as a divergence, three pushes in a trend, etc. That is, trade the pullback/rally in an uptrend/downtrend. However, this would be a scalp only, not a big picture play. The point that I was trying to make was that fighting the trend is a tough way to trade, and hence, make money, IMO. Why not follow the trend and trade with the wind at your back? Catching a trend early and riding it is the best trading opportunity that the market presents, but unfortunately it only happens about 30% of the time. That's why I believe learning to trade brackets is important for full-time daytraders. Just my opinion, so take it FWIW. :)

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Great point ant. Counter trend trading is alot harder than trend trading. I know a trader who is an amazing counter trend trader but when I tried to use her methodology into my trading style, it did not work. Also, counter trend trading is more geared towards scalping. You may catch the dead highs/lows but this is a rare case.

 

You don't always have to try to be the man by catching the top or bottom. You can make a comfortable living just by catching the meat or the middle of the trend.

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Thank you guys. I find this thread very useful. I have to admit, I have lost plenty of money trying to short a trending market. In my early weeks as a trader I thought the RSI and price divergence was the Holy Grail. Alot of times price did not move and I ended up taking comission losses.

 

Is there a way to anticipate a trend market or a bracketed market? I understand different trading strategies must be employed in both cases. But it would be extremely helpful if a trader knew which strategy to use before the trading day. Thank you

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The TTM Squeeze is a very good concept, but having observed it for a while, have found it to be less accurate than many people think. Of course we know that no indicator is anywhere near perfect, but with that being the case, I still wouldn't feel comfortable relying on an indicator to enter a position. But there is a good chance I was reading it wrong, so definitely check it out and see for yourself what you think. Good luck.

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Namstrader, I see what you mean (see chart below). By the way, attached is the Squeeze indicator re-created by other traders. Note that I have never used this indicator and cannot vouch for its accuracy.

 

Actually the TTM Squeeze is itself a rip-off, er, "re-creation" of the BB Squeeze originally posted and coded on the Tradestation forums.

 

Hubert and Carter were just smart enough to clean it up, repackage it and market it to the masses. That's all.

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I am interested in learning how Bollinger Bands are used in trading. What is the purpose of this tool? Is anyone trading effectively using Bollinger Bands? Thank you

 

 

 

Go get Bollinger's book: Bollinger on Bollinger Bands.

There is no point in inventing your own trading rules when you don't know what you are doing.

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Bollinger bands are a chart of three curves drawn in relation to currency pair prices. The band situated in the middle is a measure of the intermediate-term trend and is usually a moving average (MA) that serves as the base for the upper and lower bands. Interval between lower, middle, upper bands is determined by the volatility of the market, normally the same data that were used for the MA. The default parameters are 20 periods and two standard deviations above and below the middle band and of course this may be adjusted if needed.

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Since this thread is talking about channel, I just came across a book recently "Channel Surfing: Riding the Waves of Channels to Profitable Trading" by Michael Parsons. I did not read it yet for the moment. Does anyone have comments of its channel trading method? only idea.

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Since this thread is talking about channel, I just came across a book recently "Channel Surfing: Riding the Waves of Channels to Profitable Trading" by Michael Parsons. I did not read it yet for the moment. Does anyone have comments of its channel trading method? only idea.

 

How about reviewing the book and let us know what you think of it?

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