Bollinger Bands® have been gaining in popularity in the past couple of years. This is no surprise given the changes in the Market Structure and how price behaves with more of the Exchanges, Dark Pool Alternative Trading Systems ATS, Electronic Communication Networks ECNs and other orders now automated.
Bollinger Bands offer a highly visual method of seeing the compression patterns that occur before breakouts of significant magnitude. This indicator also helps those retail traders and individual investors who are still struggling with Spatial Pattern Recognition Skills™ and have trouble recognizing whether at stock is still trending up or down, or if it has shifted sideways. The sooner a retail trader can identify a sideways shift the better as sideways patterns require different entries, stop losses, and exit strategies.
It is important to maintain a good ratio on the candlestick stock chart so that the Bollinger Bands are properly displayed. Many times traders attempt to use too many indicator windows on one template layout. Be sure that the height and width ratios are close to the Golden Mean ratios.
Bollinger Bands make it far easier to determine if a Platform is underway, or if it is a wider sideways, or a Trading Range pattern Market Condition.
Below is a chart example of a stock that had been in a Trading Range pattern over a few months, then had a High Frequency Trader HFT velocity run. The current compression shows nearly perfect horizontal Bollinger Bands on both the upper and lower band, indicating that price is compressing inward equally from highs and lows. This is a powerful price pattern that is often missed by novice retail traders.
The equal compression means that there is equilibrium between buyers and sellers at that moment, which tends to favor the upside after an HFT driven velocity run. Quiet accumulation is underway with Dark Pool buying going on unnoticed for the moment, as shown in the TTQA indicator in the bottom chart window. Dark Pools control price to create these patterns.
Since this first velocity run was triggered by HFTs, the next move up was likely to also be an HFT gain day. The next few days the stock moves up a little higher and compresses again, then HFTs move the stock up a couple of points in one day as shown in the next chart example below.
The entire sideways action after the first HFT velocity run was a period of quiet accumulation with Dark Pools buying on their Alternative Trading Systems ATS, with the general market exchanges unaware of their activity. Once the word gets out, HFTs automated orders drive price upward. There were two entries before the stock moved on HFT price action, and both offered a low risk entry prior to the big run day.
To use Bollinger Bands properly you must incorporate Volume indicators. Bollinger Bands is a Price Channel indicator, so the direction the stock will take is not easily evident to most retail traders. By adding Volume indicators a retail trader has a complete set of data, which provides all the necessary information to determine what direction the stock will move out of the compression pattern.
Many retail traders benefit from adding Bollinger Bands with Volume indicators to their trading rules and parameters.
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Martha Stokes CMT
Instructor & Developer of TechniTrader Stock and Option Courses
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