Probability Bands

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protradingsys

Hello Everyone,

I have searched through many threads and can not find anybody else who trades using the Probability Bands. These are the levels based on each stock or indexes volatility and discussed by Kevin Haggerty in his trading manual.

They give the trader various standard deviation volatility moves each day, a 65%, 80%, 88% and 95% probable high or low.

You can see on May 12th the NASDAQ hit its 95% probable low and had a huge rally. This was helped by both the Semis and Biotech also being on their probability bands and reversing.

qqq051204.gif
 

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Its really almost the same thing.. I did some study on this a while back.

I would compare all these different volatility type bands like bollinger, keltner, prob., hagerty.. etc.... similar to the different variations of the moving average ( simple, exp. weighted, adaptive, etc..)

At the end of all my research I still use the basics.. simple MA and occasional bollinger bands at default (20,2). Niether of them alone will make u money.. but they can be used as a decent visual to show u what has happened.



--MIKE
 
Quotetracker now offers Percent B as an indicator which positions the endpoint of an oscillator in a range between 0 and 100 indicating where price is in relation to the Bollinger Bands. You can adjust lookback and standard deviations to get the fit you want.
 
Quote from Trend Fader:

Its really almost the same thing.. I did some study on this a while back.

I would compare all these different volatility type bands like bollinger, keltner, prob., hagerty.. etc.... similar to the different variations of the moving average ( simple, exp. weighted, adaptive, etc..)

At the end of all my research I still use the basics.. simple MA and occasional bollinger bands at default (20,2). Niether of them alone will make u money.. but they can be used as a decent visual to show u what has happened.



--MIKE
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I agree Mike. Years ago when John Bollinger first published his work, I lost a lot of $ trading counter trend by thinking the market was "stretched". I'd rather miss a buying opp on a day like Wednesday than be left holding the bag on that 7% one day decline that will sooner or later occur.
 
Actually these bands are totally UNLIKE Bollinger, Keltner, etc.

Most bands that traders use are based on a moving average and the 'bands' are projected above and below them.

For one, these bands are only calculated once per day based on YESTERDAY's closing price and each stock, index, or sector's volatility (this changes slightly each day).

Many hedge funds and institutions use these levels but the avg trader is unaware of them or their usefulness. This is probably due to there only being one charting package on the market that plots these, due to the requirement of outside volatility data on every instrument and this is very expensive data.

Here is an example of the Semi Conductor Index for Friday 5/14. I put Bollinger Bands on the chart too to illustrate how different these are.

sox051404.gif



There are many ways to trade with these bands but I put them on all sectors and indexes and look for reversals at these levels. I also glance at my sector heatmap I created that shows me all the major sectors, how much up or down they were at various times during the day as well as NYSE and NASDAQ advancers/decliners and up/down volume.

sectorheat.gif
 

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Can these probability bands be used with the YM Futures.(Emini Dow) as reversal levels. Then if they fail use the next band as "going with the trend level" or "breakout level"?

Very interesting indeed.

Michael B.
 
On Friday when I saw the Semis hit the 65% probability low band I looked at my list of Semiconductor stocks and noticed MXIM was also near its band on lower than average volume (MXIM traded 80% of its avg 10 day volume). I usually trade with the trend but if I see an opportunity for a low risk buy (risk 20 cents) and the stock is not down on high volume I will take a shot. This was right around noon and the indexes supported the trade (Dow consolidated at its 20 period hourly moving average, Nasdaq found support and was moving higher off of its midpoint pivot level, and the S&Ps were also starting to go up).

Here's MXIM's chart. Of course stocks don't always bounce off these levels to the penny as does MXIM here but like any other support/resistance level often does it pretty close. I use 10 cent stops for NYSE stocks and give Nasdaq stocks a bit more room with 20 cent stops. As with any trading system if you can consistently keep your losses small and the winners are two to three times losers and you're right over 50% of the time you will do well.

mxim051404.gif


This is the ultimate trade using this system, the Sector was at a probability band, MXIM tagged its, and the S&P's, NASDAQ, and Dow had all bounced off support. The Semis were down over 2% at this time while the rest of the market was much stronger.

I could post 50+ charts every day that hit and bounce off these levels. This software I use automatically puts charts up for the top or weakest stocks (depending on how you sort) so when I see a sector at a reversal level I can quickly view all of that sector's strongest or weakest stocks and see which have the best risk/reward opportunity.

 

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Quote from ElectricSavant:

Can these probability bands be used with the YM Futures.(Emini Dow) as reversal levels. Then if they fail use the next band as "going with the trend level" or "breakout level"?

Very interesting indeed.

Michael B.
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The software I use just has these probability band levels for the S&P, Nasdaq, and Dow, all major sectors, and 1,400 of the most commonly traded stocks.

I suppose you could calculate these on any instrument if you had the previous day's closing price and its volatility.
 
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