Timing the market with Bollinger Bands

C

cashmoney69

I dont mean for this thread to sound like a "Holy grail" type question, however I've been using BB's on weekly charts for a while and notice that when a stock pierces through a upper or lower bands, its not too long till that stock will reverse (often sharply) up or down, back into normal consolidation. This in itself, mixed with a few MA's seems like a very simple startegy for picking tops and bottoms close to the actual top/ bottom. Looking at a weekly chart for RMBS, on 12/17/04 the stock broke above the upper bands, followed by a 5 week reversal. Same for 1/13/06 - 1/27/06.

BB's are said to predict time better than price. How can I use BB's to predict when a stock will rise above/ below these bands and get in before the move takes place?
 
Quote from cashmoney69:

I dont mean for this thread to sound like a "Holy grail" type question, however I've been using BB's on weekly charts for a while and notice that when a stock pierces through a upper or lower bands, its not too long till that stock will reverse (often sharply) up or down, back into normal consolidation. This in itself, mixed with a few MA's seems like a very simple startegy for picking tops and bottoms close to the actual top/ bottom. Looking at a weekly chart for RMBS, on 12/17/04 the stock broke above the upper bands, followed by a 5 week reversal. Same for 1/13/06 - 1/27/06.

BB's are said to predict time better than price. How can I use BB's to predict when a stock will rise above/ below these bands and get in before the move takes place?
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An indicator-based trading system means nothing without a valid backtest: 30 or more trades (after subtracting the number of optimized parameters), plus reasonable assumptions for commissions and slippage. I had the "Holy Grail" indicator until I added a realistic commission to my backtest. Then, not so much. :p

What does your backtest tell you about the usefulness of BBs?
 
I havn't done any backtesting. This is just what I've observed from looking at charts.

Quote from kut2k2:



What does your backtest tell you about the usefulness of BBs?
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Cashmoney,
I have done quite a bit of trading with Bollinger Bands. I actually talk about them in my journal from time to time. Here is a document that might help answer this question for you. These are very good to trade options with also and they can tell you when a big move is about to happen. Another place to look is Romik's divergence journal he just posted a trade he is looking into using the tight bollinger bands in combination with divergence for direction. I am looking forward to watching that trade and see how these 2 work together. Hope this helps.

4re
 

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Quote from cashmoney69:

4re

can you make that file a .txt file for me? I dont have MS word on my comp.

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Hey Cash,
Here is the website I got it from I would rather do it way because it helps to see the charts with it. Also for Romiks journal here is what he is doing. He has spotted a stock that is setting up a Bearish divergence, so he is expecting the stock to go down. Then he noticed that the Bollinger Bands are very tight signifying a big powerful move soon. So he is putting 2+2 together and hopefully coming up with 4. Hope this helps.

http://www.tradingmarkets.com/.site...bands-to-time-QQQQ-breakouts-by-Rob-Hanna.cfm
 
Bollinger bands are definitely useful in letting us see clearly where the lower and upper limits of price are in relation to the present price. A look at price action within the bands will show that price often goes from one band to the other, and when the price pierces the bands, it usually changes direction back towards the other band.
According to books I've read however, there seems to be a wrinkle to this theory. It seems that it is good if price touches, but does not pierce the band. In the event that it pierces the band, this is then taken to mean that the momentum in that direction is strong, and so price is expected to continue in that direction rather than reverse. So this is pretty confusing to me, as the difference between touching and piercing the band actually boils down to just a few cents of price movement, but the 2 situations have different interpretations. But actual examination of charts seem to suggest that price does reverse usually even when the bands are pierced.
The other thing one can see is the price riding the bands up and down. I'm just wondering whether there are some indicators that will give us an idea whether this is going to happen when the price reaches the bands, or will reverse as is the more common behaviour?
 
Richard Donchian used a breakout system very well and many traders used his idea over the years. I like using the bands for trading and prediction. You can get a good idea what the bands should be based on past time frame. Eg, gold may show an average 2.5 standard deviation over x days. The problem is how do you know that the market will reverse in your favor or move 3 or 4 deviations against you. I have the same problem with the moving average, you get whipsawed and frustrated by false breakouts only to miss the big moves. I have been burned a few times assuming the market will reverse after x standard deviations. I welcome comments or criticism, especially stop or exit strategies using the bands.
 
Yes, it is frustrating being caught in a false break, or being slaughtered in a bull or bear trap. Been there many times - no fun at all.
The difficulty is in guessing as the price gets near the band, whether it will or will not pierce it. If it doesn't pierce the band, then a reversal is expected, and if it does, then a continuation is expected. Using other indicators such as stochastics or rsi may partially give some clues, but not the whole picture.
After doing more reading in the past day, I came across an idea that seems useful. In the event that the price pierces the band, we should wait until the price moves back into the band before taking a position based on price reversing. This seems to make eminent sense to me, because in the event that the price is going to ride the bollinger, it suppose it will continue piercing and hugging the band all the way up or down as the case may be?
Also I 've realised that in general, extended up moves happen when the price is above the 20 day MA, and vice versa. So based on this, it is good to only take up long positions that fulfill this condition. However, for swing or short trade, it is probably okay to disregard this condition, and indeed the opposite situation may even be desirable (such as in shorting a stock that is overextended high above the 20 day MA).
 
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