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Bollinger Band

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59 replies to this topic

#1
Ahir

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    Dear fellows,
    As i am new to the Technical Analysis and i always found myself confused when ever i thought to take start in this field of Art. Thanks to the Tezimandee forum in general and Mateen & Alam bhai in particular, here i got the way to have a enterance step in TA. After very much brainstorming i decide to take start from Bollinger Band analysis. From Alam bhai's advise i am posting here some initial exchange at BB analysis with Mr.Steve. i hope this will help newcommers (just like me) to learn from the experience of the experienced fellows here.

    Please keep in mind that this is not THE recommendations in any case.

    Regards,
    --
    Ahir



    Hi Ahir,

    Welcome!

    The main idea behind BB's is to sell when it breaks or hits the top band (indicated by the red arrows) and buy when it breaks or hits the bottom band (green arrows). As you can see in the copy of your chart below (I could not bring FFBL up in either of my charting programs) this would have worked out great some of the time and a bit early/late other times using BB's alone. This is partly because BB's can ride the top band for a while (green circles) or the bottom band as well (red circle). This is a great example and I hope you continue to post this chart as it progresses. What exchange is FFBL on?

    Again, a few times the BB's alone gave the only signal needed (for 3 of the 4 buys) but they were correct in only 2 of the 5 sells. However, in the 3 cases where they gave an early sell signal (all 3 green circles), using candlesticks gave a sell signal the next day as well in all 3 cases but they were wrong too so either way you would have been out.

    Regarding an entry into FFBL at this time it looks as though you have hit resistance at the 10 dma for now. I would wait for it to clear this resistance before getting in.

    Steve

    --------------------------------------------------------------------------------
    Attached File  FFBL1.png   69.79K   85 downloads

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    Hi Ahir,

    Thanks for posting the updated chart for FFBL. It shows that the 10 dma was indeed strong resistance as we had talked about in the previous post and FFBL came back down from there to the bottom BB where it has been sitting the last 2 days. Using BB alone this is giving a buy signal at this time but using candlesticks alone it does not look like a buy as those are bearish candles. As we already know, it can ride the bottom band for a few days so this could be a false buy signal from the BB. It will be interesting to see where FFBL goes from here as it definitely looks oversold and the BB's are saying "buy". I would wait for a bullish candlestick signal along with this due to the recent false buy signal but let's see what happens this week.

    Attached File  FFBL2.png   179.74K   28 downloads

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    Steve,

    Here is the response of one of our members in TM forum,in response to my question about BB.

    ----------------------------------
    Well bollinger bands are nothing more than just a standerd deviation of 20 days simple moving average.

    You can find a lot of stuff on internet about BBs and how to interpret it. The only major issue with most of the study material available is that we "the newbies" misunderstand what is being taught in that material. We normally read these books like text books, read line by line and translate it into urdu in our mind and think we have understood the meanings. Just read the whole thing and try to co relate all the material.

    Like for example BBs. You will find one article which says buy when the price pierces the upper band. Yet another article will say that when a price closes inside a BB, it is a possible trend reversal. Now I have seen a lot of cases where the price closed outside the upper band one day and closed inside the band the next day. Now what would you do? Buy on one day on preopen after band breach and sell on the very next day on preopen when the price closed inside the band leaving you with a 5%+5% loss and the worst part for the small trader is that most of the times the scrip finally moves in the initial direction but the trader is unable to buy back this share either because he is short of exposure or because he is too afraid of this share.

    Now the main key in BB which most of us ignore while reading the study material is;
    -Price tends to oscillate along the centre line which is actually a 20 days simple moving average.
    -When price reverses from one band, it tends to move all the way to the opposite band.
    -If the the move slows down on the center line, there are good chances that it will not cross this centre line. ( You won't find any explanation just think what does it mean. ) It means that if it won't cross and we also know that price tends to ocillate then it must go back to the originating band. Now think a little deeper. If the price will go back to the originating band, will the force be same when it touched the band earlier? NO. It will be greater because the scrip is now more bullish/bearish. So my dear friend that would be the right time to enter a long/short trade when the price first tries to pierce the band, fails, comes back to the centre line and is bounced off the centre line. This time it will pierce the band deeper. for a typical example see KSE-100's graph and look at the pattren between 17042006 to 19052006. No need to mention here but after reading this post and then looking at the graph just visualise what you could have done having a clear bounce off on 09052006 just a start of month and a whole month to go before future counter settlement.

    I don't say that you will catch each and every move which can earn you money using this technique (cause their are many others) But I can assure you following things;
    1- You will be able to study a lot more scrips in the same time you used to waste on few.
    2- You will find sufficient moves to keep you busy.
    3- You will dramatically reduce your losses.
    4- You will even more dramatically increase your profits.

    --------------------------------

    I guess you know most of it but this is just in case Ahir pops in here. You can add more to it.

    Talking about JSIB, (scrip for which i sent you the data and you came up with simple and clear analysis), didnt it form a falling window on the last day

    I am going to look up for windows in Nisons book as this aspect is still unclear to me. I have copied the bit about windows from here too. Let us see if i can make any headway. Thank you for all you have done.

    Regards

    M.Alam


    #2
    alam

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    View PostAhir, on May 22 2006, 03:22 AM, said:

    Dear fellows,
    As i am new to the Technical Analysis and i always found myself confused when ever i thought to take start in this field of Art. Thanks to the Tezimandee forum in general and Mateen & Alam bhai in particular, here i got the way to have a enterance step in TA. After very much brainstorming i decide to take start from Bollinger Band analysis. From Alam bhai's advise i am posting here some initial exchange at BB analysis with Mr.Steve. i hope this will help newcommers (just like me) to learn from the experience of the experienced fellows here.

    Please keep in mind that this is not THE recommendations in any case.

    Regards,
    --
    Ahir

    Hi Ahir,

    Welcome!

    The main idea behind BB's is to sell when it breaks or hits the top band (indicated by the red arrows) and buy when it breaks or hits the bottom band (green arrows). As you can see in the copy of your chart below (I could not bring FFBL up in either of my charting programs) this would have worked out great some of the time and a bit early/late other times using BB's alone. This is partly because BB's can ride the top band for a while (green circles) or the bottom band as well (red circle). This is a great example and I hope you continue to post this chart as it progresses. What exchange is FFBL on?

    Again, a few times the BB's alone gave the only signal needed (for 3 of the 4 buys) but they were correct in only 2 of the 5 sells. However, in the 3 cases where they gave an early sell signal (all 3 green circles), using candlesticks gave a sell signal the next day as well in all 3 cases but they were wrong too so either way you would have been out.

    Regarding an entry into FFBL at this time it looks as though you have hit resistance at the 10 dma for now. I would wait for it to clear this resistance before getting in.

    Steve

    --------------------------------------------------------------------------------
    Attachment attachment

    *******************************************************************************
    *******************************************************************************
    *******************************************************************************

    Hi Ahir,

    Thanks for posting the updated chart for FFBL. It shows that the 10 dma was indeed strong resistance as we had talked about in the previous post and FFBL came back down from there to the bottom BB where it has been sitting the last 2 days. Using BB alone this is giving a buy signal at this time but using candlesticks alone it does not look like a buy as those are bearish candles. As we already know, it can ride the bottom band for a few days so this could be a false buy signal from the BB. It will be interesting to see where FFBL goes from here as it definitely looks oversold and the BB's are saying "buy". I would wait for a bullish candlestick signal along with this due to the recent false buy signal but let's see what happens this week.

    Attachment attachment

    *******************************************************************************
    *******************************************************************************
    *******************************************************************************

    Steve,

    Here is the response of one of our members in TM forum,in response to my question about BB.

    ----------------------------------
    Well bollinger bands are nothing more than just a standerd deviation of 20 days simple moving average.

    You can find a lot of stuff on internet about BBs and how to interpret it. The only major issue with most of the study material available is that we "the newbies" misunderstand what is being taught in that material. We normally read these books like text books, read line by line and translate it into urdu in our mind and think we have understood the meanings. Just read the whole thing and try to co relate all the material.

    Like for example BBs. You will find one article which says buy when the price pierces the upper band. Yet another article will say that when a price closes inside a BB, it is a possible trend reversal. Now I have seen a lot of cases where the price closed outside the upper band one day and closed inside the band the next day. Now what would you do? Buy on one day on preopen after band breach and sell on the very next day on preopen when the price closed inside the band leaving you with a 5%+5% loss and the worst part for the small trader is that most of the times the scrip finally moves in the initial direction but the trader is unable to buy back this share either because he is short of exposure or because he is too afraid of this share.

    Now the main key in BB which most of us ignore while reading the study material is;
    -Price tends to oscillate along the centre line which is actually a 20 days simple moving average.
    -When price reverses from one band, it tends to move all the way to the opposite band.
    -If the the move slows down on the center line, there are good chances that it will not cross this centre line. ( You won't find any explanation just think what does it mean. ) It means that if it won't cross and we also know that price tends to ocillate then it must go back to the originating band. Now think a little deeper. If the price will go back to the originating band, will the force be same when it touched the band earlier? NO. It will be greater because the scrip is now more bullish/bearish. So my dear friend that would be the right time to enter a long/short trade when the price first tries to pierce the band, fails, comes back to the centre line and is bounced off the centre line. This time it will pierce the band deeper. for a typical example see KSE-100's graph and look at the pattren between 17042006 to 19052006. No need to mention here but after reading this post and then looking at the graph just visualise what you could have done having a clear bounce off on 09052006 just a start of month and a whole month to go before future counter settlement.

    I don't say that you will catch each and every move which can earn you money using this technique (cause their are many others) But I can assure you following things;
    1- You will be able to study a lot more scrips in the same time you used to waste on few.
    2- You will find sufficient moves to keep you busy.
    3- You will dramatically reduce your losses.
    4- You will even more dramatically increase your profits.

    --------------------------------

    I guess you know most of it but this is just in case Ahir pops in here. You can add more to it.

    Talking about JSIB, (scrip for which i sent you the data and you came up with simple and clear analysis), didnt it form a falling window on the last day

    I am going to look up for windows in Nisons book as this aspect is still unclear to me. I have copied the bit about windows from here too. Let us see if i can make any headway. Thank you for all you have done.

    Regards

    M.Alam


    Ahir,

    Thanks. Appreciate your efforts.

    Regards

    M.Alam

    #3
    Ahir

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    Dear fellows,
    Here is the update of the previous discussion and it is very usefull by it self.I believe after going through all of you will always keep BBs in your decision making.
    Mr. Steve writes:

    In the original post in February that started this thread I stated that I did not use BB's and was not familiar with them. This is fairly evident by the way I was analyzing the charts Ahir sent as I now see it was the wrong way. I did a fair amount of reading on this Monday and Tuesday and now have a much better grasp on how to use BB's correctly. Thank you, Alam, for the detailed post from your friend at the TM forum. It's good to hear from someone with experience in BB's and it apparently is some very accurate information. The way I was doing it wasn't completely wrong as apparently some folks do it that way but I have found that it's not the way it was meant to be used.

    OK...I think we should probably start over due to this or at least review the important details and then look at the FFBL chart again and do it the right way this time. The more I read about BB's, the more I think they can be useful if used correctly.

    In the first post in this thread a lot of the information was from the stockcharts.com web site as I stated. Part of it said:

    Buy and sell signals are not given when prices reach the upper or lower bands. Such levels simply show that prices are high or low on a relative basis. A stock can become overbought or oversold for an extended period of time. Knowing whether or not prices are high or low on a relative basis can enhance our interpretation of other indicators and assist with timing issues in trading.

    I neglected to pay attention to this as it was 3 months after I posted this when we got started on FFBL and I jumped in without reviewing the information.


    I spent some time on the bollingerbands.com site which is John Bollinger's site...the guy who created BB's. In the Tutorial it says:

    They do not, as is commonly believed, give absolute buy and sell signals based on price touching the bands. Touches of the bands are just that, touches not signals. A touch of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A touch of the lower Bollinger Band is NOT in-and-of-itself a buy signal. What they do is answer the question of whether prices are high or low on a relative basis. Armed with this information, an intelligent investor can make buy and sell decisions by using indicators to confirm price action.

    I recommend the use of BB's as buy, sell and continuation signals through the comparison of an additional indicator to the action of price within the bands. If price tags the upper band and indicator action confirms it, no sell signal is generated. On the other hand, if price tags the upper band and indicator action does not confirm (that is, it diverges). we have a sell signal. The first situation is not a sell signal; instead, it is a continuation signal if a buy signal was in effect. Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band. Closes outside the Bollinger Bands can be continuation signals, not reversal signals.


    From investopedia.com in The Basics Of Bollinger Bands:

    When using Bollinger Bands, designate the upper and lower bands as price targets. If the price deflects off the lower band and crosses above the 20-day average, the upper band comes to represent the upper price target. In a strong uptrend, prices usually fluctuate between the upper band and the 20-day moving average. When that happens, a crossing below the 20-day moving average warns of a trend reversal to the downside.


    And your friend states:

    Now the main key in BB which most of us ignore while reading the study material is;
    -Price tends to oscillate along the center line which is actually a 20 day simple moving average.
    -When price reverses from one band, it tends to move all the way to the opposite band.
    -If the move slows down on the center line, there are good chances that it will not cross down through this center line. It means that if it won't cross and we also know that price tends to oscillate then it must go back to the originating band. Now think a little deeper. If the price will go back to the originating band, will the force be same when it touched the band earlier? NO. It will be greater because the scrip is now more bullish/bearish. So that would be the right time to enter a long/short trade when the price first tries to pierce the band, fails, comes back to the center line and is bounced off the center line. This time it will pierce the band deeper.


    As a result of all this, this is how I will analyze the chart in the following post:

    * Do NOT simply use a touch of the top or bottom band to buy or sell.
    * Buy on a close up over the 20 dma on the way back up from the bottom band.
    * Buy on any bounce off the 20 dma if it was sold on the way down from the top band before the 20.
    * Sell on a close below the 20 dma.
    * When the top band is reached...use candlesticks, volume, and stochastics (or whatever you usually use) to determine when to sell as it can ride the top band for a while sometimes. Watch for divergence at the top band between your indicators. This will not be a problem at the bottom band as we will always sell on a close below the 20 dma...long before it hits the bottom band.

    The only thing I don't like is that sometimes you can miss out on some nice money while you are waiting for prices to go from the bottom band to above the 20 dma. It's kind of like IBD's Cup With Handle pattern in this respect as you are supposed to wait while prices climb up the right side of a cup and then wait for it to break out of a handle after that before buying. It can also be compared to waiting for the confirmation point in a double bottom pattern.

    I assume it's more certain to continue climbing if you wait for the cross above the 20 and I'm sure it will come back on you from time to time if you buy before the 20 but an aggressive trader could buy using candlesticks at the bottom band and watching it closely. However, we'll stick to the way it is outlined above here as that is the way it was designed and probably works best.

    One thing I really like about this is the fact that, if you stick to the way it's outlined above, your losses will be minimal if the trade goes against you. By buying only off of (or fairly close to) the 20 dma and, if it goes against you, selling when it closes below the 20 dma...you'll keep your losses pretty small. The name of the game is to keep your losses small and let your winners run so if you have a habit of hanging on when a trade goes the wrong way...this could be a great method for you to use strictly. It will make you disciplined as long as you follow the guidelines.

    I used 2 charts for FFBL because I wanted to cover more than 3 months to go over more trades hoping to get a better feel for how good (or not so good) the BB's work. By including all 6 months on to 1 chart it made the candles a bit crowded and hard to read so I have Dec/Jan/Feb here and, since this post is already long enough, Mar/Apr/May in the next post. The charts are much clearer in a 3 month view. In the charts, the green dashed lines are the BB's and the light blue line in the middle is the 20 dma.

    As you can see in the chart below, December started out with the candle bouncing off the 20 dma so you should have been in at #1...which was also a Homing Pigeon signal by the way. That one worked out pretty good as you would have been up 2.95 in just 2 days. The top band was pierced at #2 but it formed a White Closing Marubozu, the volume was way above average, and the stochastics are still pointing up and not even in oversold yet so this would not be a sell yet. But the next day is a bearish signal anyway with the longer upper shadow and down from a gap up opening on high volume at the top BB. If you didn't sell then, you surely would have at #3 when it confirmed this bearish action by being down more and stochastics now pointing down from oversold.

    #4 was a buy as it opened on the 20 dma and then bounced off of it by closing .20 above it but the very next day at #5 was a sell as it closed right back below it. #5 gapped up that day and even went up strong after that so even if you waited for some time after the open it still would have been a buy as it looked great for a while...before it started back down. Selling on the close below the 20 dma here kept you from sitting on dead money for 2 weeks with only a small loss so this looks like a good guideline to stick with...especially since the next day it was down 1.00 on the Three Outside Down pattern.

    #6 was a buy on the close above the 20 dma with a White Opening Marubozu formed. This turned out to be another good one as a sell signal does not occur until the Gravestone Doji formed at #7 on over double average volume with stochastics coming down out of oversold. If that didn't get you out, certainly the Bearish Engulfing the next day with stochastics clearly pointing down would have.

    #8 is another buy on the close above the 20 which also formed a Three Inside Up pattern and was good for another nice gain. I personally would have gotten very nervous 3 days later on Jan. 31 when the Spinning Top was formed on well over double average volume on a down day at the top BB and I almost certainly would have taken profits at that time but there is no true sell signal until the Dark Cloud Cover pattern formed at #9.

    There are no more buy signals until March which is covered on the next chart. So, during Dec through Feb you would have been in and out of FFBL 4 times. 3 times would have been for big gains each time and 1 time was for a small loss. This looks very promising so far. It appears that Candlesticks & Bollinger Bands work well together when used the right way.

    Attached Files


    Edited by Ahir, 26 May 2006 - 04:48 AM.


    #4
    Adeel

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    Nice. By the way who is Steve?
    Adeel Akhtar,

    #5
    alam

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    Adeel,

    Steve Behren's is the owner/founder of site candlesticktrades.com(which i have mentioned in my posts). I have on occassion asked his opinion about different scrips, and different TA indicators and signals. He has been extremely cooperative in taking the time out for a detailed analysis of the scrip or questions that i have put up on his site.

    regards

    M.Alam


    View PostAdeel, on May 26 2006, 01:55 PM, said:

    Nice. By the way who is Steve?


    #6
    AbDuLmAtEeNkHaN

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    he joined TM also with member name of Steve B

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