Ebook: Bollinger on Bollinger Bands

Previously I quoted the summarised rules of Bollinger Bands.
Now, the complete guide to Bollinger Bands is available - by the master himself.
Bollinger on Bollinger Bands.

As usual, you are advised to download the ebook(s) soonest possible before the link expires or removed. I m not responsible of providing fresh links if they are no longer working.

Ebook: Dr Alexander Elder 2

And so, I left out the actual Entry and Exit book from my original post. Heh heh.
Here it is.

Alexander Elder - Entry & Exit

As usual, you are advised to download the ebook(s) soonest possible before the link expires or removed. I m not responsible of providing fresh links if they are no longer working.

EDIT: I forgot to give credit to Mr CS Ong for finding and sharing this ebook with me.

Ebook: Dr Alexander Elder

Dr Alexander Elder writes one of the best basic trading book covering from the right mindset, winning attitude, money management, and to essential technical knowledge.
Read all about it in Trading For a Living

After Trading For a Living, Dr Alexander Elder restrengthen and refortifies the principles to trading in Come to My Trading Room.

Maybe one still would have doubts. Perhaps Dr Alexander Elder is a genius. A rare exception. How could we mere mortals hope to emulate his successes? In the book, Study Guide to Entries and Exits, you will be shown to 16, yes 16 individuals who have different trading capitals base and levels of experience but are equally successful. They're all traders. :)

As usual, you are advised to download the ebook(s) soonest possible before the link expires or removed. I m not responsible of providing fresh links if they are no longer working.

Leading and Lagging Indicators

I've always held the belief, and still do, that all indicators are lagging. Indicators are based on past price volume action, hence lagging. However, this is my personal belief.
Mainstream wise, TA indicators are grouped into Lagging Indicators and Leading Indicators.

Lagging Indicators

Trend indicators fall into this category as they assist us in identifying the underlying trend based on past movement. This would include indicators such as Moving Averages.
As per my previous post - One shoe size fits all, I had a section on Crossover with Moving Averages as examples - terms such as Golden Cross and Dead Cross should be a familiar term.
When a Golden Cross appears, it is normally after the change of trend has already occurred fo sometime, ie, not the first sign of trend change.
Same goes to a Dead Cross, the downtrend is already obvious from the price movement itself - hence why it is labelled as a lagging indicator.

So since it is lagging, why do we need these Lagging Indicators? Well, actually, we don't really "need" them. However, they assist in helping us to "visually see" the trend continuation. As for trend reversals, they are confirmations that trend reversals has already happened.
These Lagging Indicators can also be used as entry points for Fundamentalists whose Trading/Investing Plan mainly focuses on FA. A simple TA method to use for Fundamentalist is actually Moving Average Crossovers. A reliable indicator for safe entry when the holding period is for the longer term.

Leading Indicators

Leading indicators are those which are used to predict price movement - or potential trend reversals. Indicators such as the RSI would fall into this category.
As per my previous post - One shoe size fits all, I had many sections which demonstrates how it could be applied in practice.
So why is this considered Leading? Well, the idea is that these indicators are supposed to be used to predict the future price movement - as the key reversal point are being formed.
However do take note that, Leading Indicators are best used in a Trading Range rather than a Trending Market. Sometimes, an oscillator can remain overbought or oversold condition for some time, remember?

So anyway, there, a summary of leading and lagging indicators. A trading system, in my opinion, should have a mixture of these two elements as they do complement each other. One to identify early trend change, another to confirm and provide continuation signals.

John Bollinger on Bollinger Bands

What is Bollinger Bands?
Bollinger Bands is a trading band indicator. It is an indicator that envelops the prices of a certain stock. It does NOT give a definitive buy or sell signal. However, it indicates an answer if the prices are relatively high or relatively low.

Who else to learn from about Bollinger Bands, if not John Bollinger himself?
So here are the Rules from John Bollinger himself.

One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it. While there are many ways to use Bollinger Bands, following are a few rules that serve as a good beginning point.

• Bollinger Bands provide a relative definition of high and low.
• That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
• Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
• Volatility and trend have already been deployed in the construction of Bollinger Bands, so their use for confirmation of price action is not recommended
• The indicators used for confirmation should not be directly related to one another. Two indicators from the same category do not increase confirmation. Avoid colinearity.
• Bollinger Bands can also be used to clarify pure price patterns such as M-type; tops and W-type bottoms, momentum shifts, etc.
• Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.
• Closes outside the Bollinger Bands can be continuation signals, not reversal signals - as is demonstrated by the use of Bollinger Bands in some very successful volatility-breakout systems.
• The default parameters of 20 periods for the moving average and standard deviation calculations, and two standard deviations for the bandwidth are just that, defaults. The actual parameters needed for any given market/task may be different.
• The average deployed should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-term trend.
• If the average is lengthened the number of standard deviations needs to be increased simultaneously; from 2 at 20 periods, to 2.1 at 50 periods. Likewise, if the average is shortened the number of standard deviations should be reduced; from 2 at 20 periods, to 1.9 at 10 periods.
• Bollinger Bands are based upon a simple moving average. This is because a simple moving average is used in the standard deviation calculation and we wish to be logically consistent.
• Be careful about making statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The sample size in most deployments of Bollinger Bands is too small for statistical significance and the distributions involved are rarely normal.
• Indicators can be normalized with %b, eliminating fixed thresholds in the process.
• Finally, tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.

One shoe size fits all

I am a lazy fellow. So here is one general concept that could fit with most indicators. However, do be aware that since I am generalising here, there are some that may work on certain indicators, and some don't.

Ok, let's get technical :)
Sample chart here is KLCI.
Sample indicator here is RSI.

There are few methods to do it.
1. Fixed Numbers
For different indicators, it would be different numbers but the concept is the same.
For RSI, the recommended is 30 oversold and 70 for overbought
The idea is of contrarion. Buy when market is selling. Sell when market is buying.

So, Buy signal when oversold condition seen.


Sell when overbought condition seen.



2. Trendline
For price action, many draw trendlines. For Indicators, we could also do the same.
The whole idea is the same:

When resistance is broken, buy.


When support is broken, sell.



3. Midline
For some indicators, the midline is zero.
For RSI, the midline is 50.
The idea about this is continuation and also the concept of support and resistance.
50 is the middle ground. So it should be the contention of the bulls and the bears.

When crossover upwards, its a buy signal.


When crossover downwards, its a sell signal.



4. Divergences
Basically the idea of divergences is that when the indicator does not move in line with the price. The idea is that accumulation or distribution may be at work and the price does not show it. Hence, the hidden power of indicators.

Buy when positive divergence is seen.
Positive divergence means that Price goes down or neutral but the indicator shows uptrend.


Sell when negative divergence is seen.
Negative divergence means that Price goes up or neutral but the indicator shows downtrend.



5. Crossover
Basically here we will be using Moving Averages as our sample indicator.
Lets use the popular Exponential Moving Average (EMA) 50 days and 20 days
Basically the idea is simple. When the EMA of shorter period crosses the EMA longer period its a signal.

Buy when crosses up. This is also known as the Golden Cross.


Sell when crosses down. This is also known as the Dead Cross.


Legends:
EMA 50 - Purple Line
EMA 20 - Orange Line


Disclaimer: While the charts may look wonderful, as if all the signals work, in reality it does not. It look fantastic because I made it look so. I only show you the ones that work, too lazy to upload more charts that show how it does not work. Parameters/settings of the indicator also come into play. As I do not use RSI, I could not advise you the settings :P. Self analysis is strongly advised. Best to fit to own trading strategy/trading style.