Friday, January 10, 2014

TechniTrader Weekly Stock Discussion: “How to Use Bollinger Bands in a Platform Market Condition”

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
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
This Stock Discussion and Training Lesson is sponsored by
MetaStock® Partner                                                                 

©2014 Decisions Unlimited, Inc.  All Rights Reserved.
TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service

No comments: