|
Bollinger bands are simply calculated by taking a moving average (usually 20 days) and then producing an envelope of an upper band and lower band, one standard deviation away. The statistical significance of these bands is simply that 95% of price action will occur between the upper and lower lines. From that we can infer that if the price moves outside of a band, it is likely to move back into the envelope.
I have written previous articles on how to use Bollinger bands for trading purposes, but here I would like to put things into the context of ProfitSource and Elliott wave trading. All the rules and applications we have considered before remain perfectly appropriate, however, here is a way to use BB’s as an additional filter to Wave 4 trades. The logical conclusion we can derive is that the end of a W4, coinciding with a bounce from a BB, has a high probability of moving back into the price envelope. For a W4 buy, then, a bounce off the lower Bollinger band is likely to result in an upward movement in price, complimenting and validating the Wave Four.
click to enlarge
In addition to this, we need to be aware that perfection in the market is a rare thing. Rather than expecting a bounce from the band at the ‘exact’ point, we can incorporate a reasonable level of flexibility – a tolerance level.
click to enlarge
To build a scan to facilitate this in ProfitSource is quite simple. It is a two-step process. First you will need to add loose Elliott criteria and then the Bollinger band component. The example below conforms to the screen shots (Wave Four Buy and bounce from the lower Bollinger band):
First, open up a new market scan and give it an appropriate name. Next, select Elliott Wave from the hilites criteria and check the boxes as per the screenshot below. There is no need to be too specific in terms of Elliott at this stage, rather the benefit will come from having more hits in our scan and then keeping the charts as future trading possibilities.
click to enlarge
The second stage of our scan requires adding the Bollinger bands within tolerances. We are now looking for the lowest low of price to move below the lower Bollinger band within a 2% tolerance, over the last 7 trading days. Equally, if the lowest low of price moved to a point within 2% above the lower Bollinger band, this will also show up in our scan. Hence we use a multiple of 0.98 and 1.02.
click to enlarge
This template will provide a good start to the scanning process. You may wish to experiment with the levels of tolerance to improve or reduce the level of hits you get. Increasing the tolerance (from 0.98 to 0.97 AND 1.02 to 1.04, for example) will result in more possible opportunities whereas tightening the tolerance will provide fewer, but more theoretically accurate results. Once you become comfortable using this type of arrangement it is easy to start looking at different indicators in a similar manner. Volex or various moving averages can further improve your successes.
Stay sharp,
John Jeffery
|