MetaStock®
SPRS Series - Week 153 – January 10, 2014 - MetaStock Spatial Pattern
Recognition Skills Series written by Martha Stokes CMT
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 traders and
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
trader can identify a sideways shift the better as sideways patterns require
different entries, stop losses, and exit strategies.
It is important that you maintain a good ratio on your chart
screen 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 trading range
pattern.
Below is an example of a stock that had been in a trading range
pattern over a few months, then it had a High Frequency Trader HFT velocity
run. The current compression shows near
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 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
ATS buying going on unnoticed for the moment. Dark Pools control price to
create these patterns.
Since this first velocity run was triggered by HFTs, the
next move up is 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.
Summary: The entire sideways action after the first HFT
velocity run was a period of quiet accumulation with Dark Pools buying on their
ATS, and the general market exchanges unaware of their activity. Once the word
gets out, HFTs automated orders drive price upward. There were 2 entries before the stock moved
on HFT price action, and both entries 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 traders. By adding volume a
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 traders benefit from adding Bollinger Bands with volume
indicators to their trading rules and parameters.
For more information on Bollinger Bands visit http://goo.gl/ePuJB5
Trade wisely,
Martha Stokes CMT
Chartered
Market Technician
Member
of Market Technicians Association
Master
Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor
and Developer of TechniTrader Stock Market Courses
For
additional training visit http://technitrader.com
This
Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner
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