BOLLINGER BANDS - VOLATILITY
Stocks move from low volatility to high volatility.
Many Top Traders have said that volatility is the most important trading concept there is.
This is best seen played out with Bollinger Bands.
First Community Bancorp made a low volatility trading range move at the beginning of this chart in January and February at 19 to 20 dollars a share.
This stock moved sharply higher and the Bollinger Bands moved apart showing the increased volatility.
FCBP then corrected into June where the volatility went down into the correction low. When the correction was over and this stock made another swing move higher, the volatility increased.
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General Motors - GM - made a narrow range - low volatility move at the beginning of this chart right at $60 a share. It broke out and traded up to $68.
At the end of May, GM was trading in a low volatility range and broke out to the downside. Volatility inceased and GM made a strong swing lower.
On this swing down we could have sold all the minor pull backs.
The trick to selling the minor swings is any time the market pivots up in a down trend use the price point low left behind on the minor correction as a sell signal when the market trades back to that level.
MINOR PIVOT ENTRY SIGNAL - EXAMPLE
GM is in a strong swing move down and trades to 55. It rallies a few days to 58. When the stock trades back down to 55 this is a minor sell point and use the minor high at 58 just made as the stop if wrong on this trade.
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Embrex - EMBX - moved in a narrow range low volatility move in May. It looked like a break out to the upside and then collapsed. When Embrex started the real trend this stock made a stong move lower and all minor pivots up could have been sold as minor entry signals into this strong downtrend.
FALSE BREAKOUT
A false break out will some times happen before the real move starts.
The way to handle this is to be in trend following mode.
Stop and reverse position if the first short term signal doesn't work out.
So it may take an entry or 2 to get with the larger trend, but the strong move that will normally follow should more than make up for the small losses to get into the swing move.
MORE TRICKS TO HANDLING THE BREAK OUT
Instead of trying to catch the move right out of the narrow trend channel we can wait for the trend to get established and then look for short term entry points into the market.
One way to do this is to wait for the first break out from a low volatility range to make a correction and then use the pivot left behind as an entry point.
This would have keep us out of the false break out on Embrex as the stock made the thrust out of the trading range and then collapsed after it made the false break out to the upside.
If we had watched the sharp move out and been looking to take pivot point buy signals after the first break out we would have never got in this stock long.
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TO SUM IT UP
#1 - Low Volatility = A Trading Opportunity
#2 - Follow the Market Which Ever Way it Breaks Out.
#3 - Stop and Reverse if the First Break Out Reverses.A FEW MORE THINGS
Sometimes you will know that a stock is in a stong Bull or Bear trend and if it goes into a narrow range trading range then you could just follow it out on a break out in the direction of the larger trend.
In other words if you had a strong Bull trend the market corrected and made a narrow range move you would not take a break out to the downside as this would likely be a false break out. If a stock is in a clear Bull or Bear trend and then narrows down only trade the break out in the direction of the larger trend.
DIFFERENT AMOUNT OF SHARES OR CONTRACTS
If your trying to catch the break out you could trade a small position on the first break out and then if the trade reversed double up as the odds are the next trade would go your way and you would have a bigger position on the winning trade.
Say for example you are trading options and the stock your following goes into a narrow range move and makes a break out to the upside.
You buy 1 call option
A few days later your stop gets hit and the stock now looks like it is headed the other way ( a false break out ), you could then buy 2 puts and if the trade went your way this would help make up for the small loss.
This is something you may not want to do, but is something to think about as alot of times when a trade doesn't work out, reversing the position will be a profitable trade.
Thanks!
Jim :-)
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