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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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THE SENSIBLE GUIDE TO FOREX
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THE SENSIBLE GUIDE TO FOREX
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The Sensible Guide To Forex: Safer, Smarter Ways To Survive & Prosper From The Start
  • 4 Rules For Using Double Bollinger® Bands To Avoid Buying At The Top 3 comments
    Mar 29, 2014 7:19 PM | about stocks: SPY, FXE

    A Short Illustrated Primer On How To Use Double Bollinger®Bands To Avoid Buying At The Top Or Selling At the Bottom

    This is part of FXEmpire's continuing series of special features on trader education, and provides a solid basis for understanding double Bollinger bands.

    From late 2007 to mid-2011, gold kept hitting new highs. Those seeking an entry point had no prior support and resistance for guidance, and so many delayed and missed what were ultimately cheaper entry points? How could they have identified lower risk entry points, or at least gotten some assurance that they weren't buying at the top? When that top came, how could they have more easily identified it?

    Today, many stock investors face the same dilemma. For example, the S&P 500 remains near its all-time highs.

    (click to enlarge)

    Chart A: S&P 500 Weekly Chart, From Week Starting March 24 2013 to Week Starting March 24 2014

    Key: Yellow Bollinger®Bands: Settings Of 2 Standard Deviations, 20 Periods

    Red Bollinger®Bands Settings Of 1 Standard Deviation, 20 Periods

    Center Red Line: 20 Period Simple Moving Average

    01 Mar. 27 12.35

    Does the bull market still have life in it?

    With US and other stock indexes, and other global asset markets, at or near all-time highs, here's a helpful tool to avoid buying at the top (and also selling at the bottom).

    The following is a brief illustrated summary of the 4 rules for using double Bollinger bands (DBBs), and their application to Chart A above.

    Like any technical indicator signals, these should be confirmed by your preferred combination of technical and fundamental evidence. For background information, full details and illustrations of each rule, see our articles here and here. For a video introduction to double Bollinger®bands based on my book, see fxacademy's free coursehere. For more detailed coverage, and examples, see Chapter 8 of the book, The Sensible Guide To Forex.

    RULE 1: Go Short & Stay Short, When Price Is In Or Below The DBB "Sell Zone"

    When price is in the sell zone, downward momentum is strong enough for the odds to be in favor of continued downtrend. This rule applied from the week of September 7th (arrow A) until the week of December 14th (arrow B) in Chart 1 below.

    (click to enlarge)

    CHART 1: S&P 500 Weekly Chart Sept. 7th - Dec. 14th 2008 - SELL ZONE Framed By Arrows A and B Within Highlighted Area

    Source: MetaQuotes Software Corp, www.fxempire.com,www.thesensibleguidetoforex.com

    01 Feb. 25 20.10

    RULE 2: Go Long & Stay Long, When Price Is In Or Above The DBB "Buy Zone"

    When price is in the buy zone, upward momentum is strong enough for the odds to be in favor of continued downtrend. The rule applied for most of the period between arrows 1-4 in Chart 2 below.

    (click to enlarge)

    CHART 2: S&P 500 Weekly Chart March 8 2009 - April 4, 2010 BUY ZONE Framed By Arrows 1 To 4 Within Highlighted Area

    Highlighted area: April 19, 2009 - 31 January 2010

    Source: MetaQuotes Software Corp, www.fxempire.com,www.thesensibleguidetoforex.com

    06 Mar. 24 12.45

    RULE 3: Don't Trade Trends Based On DBBs When Price Is In The Neutral Zone

    When price is in the middle, neutral zone, momentum isn't strong enough for trend trading in your current time frame.

    Instead:

    • Trend Traders Should Cease Trading: Wait for the next entry into the buy or sell zone when momentum is strong enough.
    • Switch To Range-Trading Strategies: As we discuss in our book, in these situations it's especially helpful to also look at the range using a shorter term time frame, typically a fourth or fifth of your normal time frame. For example, those using weekly charts consult daily charts, and those using daily charts consult 4-6 hour charts.

    For example, see the period between (but not including) arrows 5 to 8 in Chart 3 below.

    (click to enlarge)

    Chart 3: S&P 500 Weekly Chart, January 31, 2010 - February 20, 2011 NEUTRAL ZONE is area between (but not including) Arrows 5 To 8 Within Highlighted Area

    Red Arrows Highlighting weekly candles of April 25 (5), 2010, May 16, (6), August 1 (7), Sept. 12 2010 (8)

    Source: MetaQuotes Software Corp, www.fxempire.com,www.thesensibleguidetoforex.com

    12 Feb. 19 18.25

    Rule 4: Minimizing Risk: Enter Longs At Bottom Of Buy Zone, Shorts At Top Of Sell Zone, Or Enter In Stages

    The purpose of this rule is to minimize your risk of buying at the high or selling at the low.

    For example, enter near or at the red Bollinger bands of the Buy and Sell Zones shown in Chart 4 below.

    (click to enlarge)

    CHART 4: S&P 500 Weekly Chart August 17, 2008 to October 3 2010

    Source: MetaQuotes Software Corp, www.fxempire.com,www.thesensibleguidetoforex.com

    14 Feb. 19 19.58

    In other words, arrow A indicates a low risk point to enter a new short position. Arrows 1, 2, 3, show low risk entry points for long positions. See Part 2 for details.

    The Big Qualification To Rule 4

    Do not attempt 'bargain hunting' if your full range of fundamental and technical evidence suggests that the move isn't just a technical pullback but instead the start of a trend reversal. If so, then avoid the trade, or take only partial positions until the trend resumes, and use conservative stop losses to minimize damage if in fact the trend you're playing breaks down.

    For example, in Chart 4 above, this bargain hunting strategy worked for taking new long positions around the times of arrows 1, 2, and 3, but not around the times of arrows 4 and 5.

    Applying The Above Rules To The S&P 500 Today: New Long Entry Point?

    Given the above rules, the current level of the S&P 500 shown in Chart A above suggests we're at a good relatively low risk entry point. If price makes a decisive move below the buy zone, we know right away the trend has lost momentum and we can exit with a small loss by setting a stop loss just below the buy zone. Again, you'd have to weigh your other technical and fundamental evidence.

    For full explanations of double Bollinger ®bands and their uses, seePart 1 and Part 2. For a video introduction to double Bollinger ®bands, see fxacademy.com's course, based on the material from my book, here.

    To be added to Cliff's email distribution list, just click here, and leave your name, email address, and request to be on the mailing list for alerts of future posts.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (3)
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  • SeekingTruth
    , contributor
    Comments (1166) | Send Message
     
    Good work in discussing and presenting more tools for the tool kit.
    When we get right down to it, many well reasoned and well based technical approaches have a great deal in common when we peel back the top layers.
    This is one more approach in assessing relative strength and short term overbought oversold points on the price charts.
    As such it can be added to and blended with a number of other good indicators and info to give it added strength and validity.
    Even so, it always leaves us with that same old problem and question: Where is the true and actual bounce point going to take place?
    If one "really believes" in an issue for purchase in the indicated time frame <(important!), he could buy at point "B" in chart 4, and also at the first strong up day at the probable oversold point at the bottom of the chart, then again at 1 and 2 , and that's enough for me thank you i.e. stopping buy at 2 gives you more buffer to deal with sell off at point 5, etc.
    29 Mar, 10:13 PM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1773) | Send Message
     
    Author’s reply » excellent input
    indeed there are only a few types of indicators, and many variations on these few types.
    Never expect to catch the bounce just right, too many people trying to fool you on that, and big institutions have a large enough sample from their own books to gauge where the buy/sell orders are clustered.
    Many different ways to deal with that, all involve trade-off of risk and reward. See the the links to the full posts for full details.
    31 Mar, 03:31 AM Reply Like
  • SeekingTruth
    , contributor
    Comments (1166) | Send Message
     
    Cliff, Thanks for reply.
    Yes, the power brokers know not only the clusters, but also the pending Big Block orders buy/sell price points that can change things a lot from what one may expect.
    This is one of the prime ways that they frustrate the small investors buy /sell orders, including HFT,which is in a different domain of course, but which has to be related in some ways.
    It can also wreck any sensible options strategy that one may have active, which is also part of their game.
    And they wonder why some of us are so skeptical.
    31 Mar, 11:52 PM Reply Like
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