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Channel Trading Techniques For Boston Forex Traders – In the 1980s, John Bollinger, a longtime market strategist, developed the technique of using a moving average with two trading bands above and below it. Unlike the percentage calculation of a regular moving average, Bollinger Bands® simply add and subtract the standard deviation calculation.
Bollinger Bands® consist of a center line and two price channels or bands above and below it. The center line is usually a simple moving average, and the price channels are the standard deviations of the stock being studied. The bands expand and contract as the issue’s price action becomes volatile (expansion) or is constrained by a tight trading pattern (constriction).
Channel Trading Techniques For Boston Forex Traders
A stock may trade trending for a long time, although with some volatility from time to time. To better see the trend, traders use a moving average to filter price action. This way, they can gather important information about how the market is moving. For example, after a sharp rise or fall in a trend, the market may consolidate by trading in a narrow direction and crossing above and below the moving average. To better track this behavior, traders use price channels that capture trading activity around a trend.
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We know that markets trade erratically on a daily basis, although they are still trading in an uptrend or downtrend. Technicians use moving averages with support and resistance lines to anticipate a stock’s price action.
Upper resistance lines and lower support lines are first drawn and then extrapolated to form channels within which the trader expects prices to hold. Some traders draw straight lines connecting price tops and bottoms to determine the upper or lower price extreme, respectively, and then add parallel lines to determine the channel within which prices should move. As long as prices remain within this channel, a trader can be fairly confident that prices are moving as expected.
When stock prices continually touch the upper Bollinger Band®, prices are considered overbought; conversely, when they continually touch the lower band, prices are considered to be oversold, triggering a buy signal.
When using Bollinger Bands®, assign the upper and lower bands as target prices. If the price deviates from the lower band and crosses the 20-day average (median line), the upper band represents the upper target price. During a strong uptrend, prices typically fluctuate between the upper band and the 20-day moving average. When this happens, a cross below the 20-day moving average warns of a trend reversal to the downside.
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The chart below shows American Express (AXP) stock since the start of 2008. You can see that most of the price action has been in the lower band, with the share price falling from the $60 level in the depths of winter to where it was in March. position is about $10. There were a few occasions when the price crossed the center line (from March to May and again in July and August), but for many traders this was definitely not a buy signal as the trend was not broken.
In the chart below for Microsoft (MSFT) from 2001, you can see that the trend changed to upward in early January. But look how slowly it showed a change in trend. Before the price crossed the center line, the stock moved from $20 to $24 and then to $24 to $25 before some traders received confirmation of the trend reversal.
This is not to say that Bollinger Bands® are not a common indicator of overbought or oversold issues, but charts such as Microsoft’s 2001 layout are a good reminder that we must start by recognizing trends and simple moving averages before moving on to more exotic indicators.
Bollinger Bands® are tools used in technical analysis. They were developed by John Bollinger, a technical trader. Bands are used to generate signals for securities that are oversold or overbought. Bands are made up of various lines plotted on a chart, including a moving average, an upper band, and a lower band.
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Bollinger Bands® are high-tech tools that give traders insight into where the market is heading based on prices. It involves the use of three bands – one for the upper level, another for the lower level and a third for the moving average. When prices approach the upper band, it indicates that the market may be overbought. Conversely, the market may be oversold when prices eventually approach the lower or lower band.
Yes. One of the main limitations is that it cannot be used as a standalone tool. In fact, Bollinger Bands® should be used with other non-correlated indicators. This can give you additional market signals that are much more direct. Another disadvantage is that they are calculated using a simple moving average. This is because older price data is weighted the same as recent data.
While each strategy has its drawbacks, Bollinger Bands® are among the most useful and commonly used tools for identifying extreme short-term security prices. Buying when stock prices cross the lower Bollinger Band® often helps traders take advantage of oversold conditions and profit when the stock price returns to the center line of the moving average.
Requires authors to use primary sources to support their work. This includes white papers, government data, original reports and interviews with industry experts. Where appropriate, we also cite original research from other reputable publishers. You can learn more about the standards we follow to create accurate and unbiased content in our Editorial Policy. One of the most widely used indicators among both retail and professional traders is the TTM Squeeze™ indicator. The TTM Squeeze™ indicator contains volatility and momentum components that traders can use to determine when and how price might break out of a tight trading range. There are many ways to use the TTM Squeeze™ indicator in your trading, and below we will look at some of them, but first we will look at the indicator itself!
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As mentioned in the introduction, the TTM Squeeze™ indicator contains both volatility and momentum components. The volatility component is measured using Bollinger Bands and Keltner Channels. When Bollinger Bands are inside Keltner Bands, the asset is said to be “squeezed.” This occurs during periods of low volatility when the price consolidates.
When Keltner Channels are inside Bollinger Bands, the squeeze is said to have “worked” and this occurs during periods of higher volatility.
The movement of the Bollinger Bands from the inside to the outside of the Keltner Channels is key here, as this movement can lead to powerful price breakouts, both up and down. To determine the expected direction of movement, traders will use the Momentum component of the TTM Squeeze™ indicator, the oscillator. The oscillator is depicted as vertical histogram bars that oscillate around the zero line. If a squeeze occurs and the fluctuating histogram bars rise above the zero line, it indicates an opportunity to go long. An example of this can be seen in the diagram below.
If a squeeze occurs and momentum falls below the zero line, it suggests an opportunity to go short.
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Finally, the zero line contains both red and green dots. The red dot is visible when the price is compressing (Bollinger Bands are inside the Keltner Channels) and the green dot is visible when the price is compressing (Bollinger Bands are outside the Keltner Bands).
Now that we understand exactly what happens during the TTM™ compression, the next step is to learn how to take trades based on it.
While the TTM Squeeze™ indicator can provide a powerful signal about where price is heading, trades with the highest probability of success typically occur when multiple indicators are giving the same signal. Below we will look at several setups that a trader can use to further confirm their TTM Squeeze™.
One way to trade the TTM Squeeze™ indicator is to use divergence. Divergence is when the histogram momentum bars begin to tilt toward or away from the “zero line” and price moves in the opposite direction. A bearish divergence is when price makes higher highs, but the histogram slope makes lower highs on the positive side of the “zero line.”
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The opposite of this would be a bullish divergence. Bullish divergence occurs when price makes lower lows, but the histogram slopes upward toward the “zero line” on the negative side of the line.
So when do we start the deal? Some traders prefer to buy on a breakout of a trend line. Others prefer to wait until the trend line is retested after the breakout. Still others require confirmation from a separate indicator, such as a moving average. There is not necessarily a right or wrong way if the risk is determined before the transaction.
Like any other technical indicator, TTM Squeeze™ is not a magic bullet and is best used with
