Bollinger Bands, Candles, and Divergences on Range Days

Oct 7, 2009: 4:48 PM CST

I wanted to share a lesson from today’s “Idealized Trades” report – namely on the importance of recognizing “Type of Day Structure” which then leads you to adopt more appropriate trading strategies.

For example, on today’s range day trading environment, the best trades came from watching these three concepts:  Bollinger Band Extremes, Candle Shadows or Reversal Candles, and TICK or Momentum Divergence.  Let’s take a quick look at some of the trades you could have taken using a combination of these concepts.


(Click for full-size image)

Let me give a quick overview:

1.  Bollinger Band Extremes:  Unless it’s a Trend Day or large momentum move, traders take signals from price ‘poking’ or ‘peeking’ outside either the upper or lower Bollinger Bands, as these reflect that price has moved at least 2 standard deviations from a 20 period average.

2.  Candle Shadows refer to “wicks” or bars outside the “real body” of the candle, which can mean “price rejection” took place and that a reversal could be at hand.

3.  Divergences – in both the TICK and the Momentum Oscillator – serve as “non-confirmations” of price highs or lows and also hint that a retracement or possible reversal is the likely move.

Taken singularly, traders can take positions off any of these basic signals.  However, traders can increase probabilities – and reduce risk – by observing what I like to call “Confluence Across Non-Correlated Trading Strategies,” such as the three methods mentioned above.

Without walking through each individual trade (I do so in each day’s summary report), take a look at the four highlighted areas on today’s SPY intraday activity (which would be structurally similar in the @ES futures or comparable ETF).

With the exception of the 11:00am CST lows (which did not have a noticeable long candle shadow), each highlighted zone reflected a confluence of the following:

A ‘poke’ outside the Bollinger Band indicator on a candle shadow which was accompanied by a momentum (and/or) TICK divergence.

To me, those create irresistable intraday trades on Range Day structures.

Stops would be placed at least 10 cents if not more (1 @ES point) beyond the lows or highs of the price extreme you are looking to “fade” or trade for a possible short term swing or reversal in price.

The target would be the opposite Bollinger Band (for an exit) or on any countervailing buy signal (such as a divergence or bullish candle that occurs prior to price touching the opposite Bollinger Band).

There’s never a guarantee any trading strategy will produce 100% accurate results, but it’s all about putting the odds in your favor and managing your risk as best as possible.

The more you know about intraday trading strategies and type of day structures, the better you’ll be able to trade effectively and see opportunities you might be missing otherwise.  It’s not about getting every last domino in a row before taking a trade – just enough to raise your confidence to put on the position and play for the target.

That’s the point of my “Idealized Trades” daily summary service – it has helped me immensely over the years to write down and annotate my trades and compare them to what I deem “idealized trades” (what I call “efficiency analysis”).

Not only do you see where you’re making mistakes, but you learn additional insights through studying price action deeper and ingraining these concepts as they repeat themselves.

Whether you decide to become a subscriber or not, I strongly encourage you to perform similar “end-of-day” analysis on your trades and your understanding of price behavior and trading opportunities – you won’t learn as much if you just trade for the day and then not look at what you traded or why you traded the set-ups (or lack thereof!) that you did.

Make each day – good or bad – a learning experience!

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

12 Comments

12 Responses to “Bollinger Bands, Candles, and Divergences on Range Days”

  1. garzooka Says:

    DO you think you could put up a new elliot wave count?

  2. Corey Rosenbloom, CMT Says:

    Hey Garzooka,

    Absolutely – though nothing has changed either in my primary or alternate count from the previous updates.

    I'll do an up-to-date post showing the recent action though. Thank you for the request!

  3. ance Says:

    Hi! I have question about this 3/10 Oscillator – how can I get it on my platform – I try all oscillators on my platform but I didn't find such one, so what is this indicators name and parameters and how can I get this TICK indicator too (name and parameters)? Thx..

  4. Corey Rosenbloom, CMT Says:

    Hey Ance,

    I have a post specifically about the 3/10 Oscillator here:

    http://blog.afraidtotrade.com/how-do-i-create-t

    It's replicated by the settings 3, 10, 16 in a standard MACD indicator.

    As for the TICK, there's no secret with it. I just overlay the symbol $TICK (would be the same in most platforms) onto my price chart and watch swing highs and lows and compare them.

    Thanks!

  5. ance Says:

    THX.. 🙂

  6. Corey Rosenbloom, CMT Says:

    Hey Garzooka,

    Absolutely – though nothing has changed either in my primary or alternate count from the previous updates.

    I'll do an up-to-date post showing the recent action though. Thank you for the request!

  7. ance Says:

    Hi! I have question about this 3/10 Oscillator – how can I get it on my platform – I try all oscillators on my platform but I didn't find such one, so what is this indicators name and parameters and how can I get this TICK indicator too (name and parameters)? Thx..

  8. Corey Rosenbloom, CMT Says:

    Hey Ance,

    I have a post specifically about the 3/10 Oscillator here:

    http://blog.afraidtotrade.com/how-do-i-create-t

    It's replicated by the settings 3, 10, 16 in a standard MACD indicator.

    As for the TICK, there's no secret with it. I just overlay the symbol $TICK (would be the same in most platforms) onto my price chart and watch swing highs and lows and compare them.

    Thanks!

  9. ance Says:

    THX.. 🙂

  10. More Divergences and Bollinger Band Trades on a Range Day | Afraid to Trade.com Blog Says:

    […] More Divergences and Bollinger Band Trades on a Range Day Oct 9, 2009: 5:55 PM CST // Like October 7th, Friday’s intraday trading action in the SPY or @ES futures gave us a range day, where the best trades came from ‘fading extremes,’ or particularly, in watching for tests of Bollinger Band extremes on TICK and/or momentum divergences.  I described these tactics in a previous post “Bollinger Bands, Divergences, and Candles on Range Days.” […]

  11. More Divergences and Bollinger Band Trades on a Range Day | Penny Stock Trading System Blog Says:

    […] Like October 7th, Friday’s intraday trading action in the SPY or @ES futures gave us a range day, where the best trades came from ‘fading extremes,’ or particularly, in watching for tests of Bollinger Band extremes on TICK and/or momentum divergences.  I described these tactics in a previous post “Bollinger Bands, Divergences, and Candles on Range Days.” […]

  12. forex system Says:

    I like this method