Wednesday, March 4, 2009

Trade #1 and Bollinger Bands

I already had a stellar morning so I pause from trading to document my most reliable setup -- Trade #1.

This morning, the market gaped up. The news was all about being overdue for a rally, which is counter to the overall trend, so I went into the market internals to get a better feel. The S&P was certainly in rally mode. however, the TICK indicator was showing flat/bearish. It seems that something is out of synch in the markets; some important sector must be failing with big-time momentum.

My charts are set up pretty clean so I can observe Price with few distractions. I use volume and Bollinger Bands (settings: 20,2), nothing else (rite now -- it might change later).

BBands are a wonderful thing to me... the center line is a 20 period moving average. When Price is below, that's a quick check bearish indication. Conversely, when Price is above, that's generally bullish. The outer bands encompass about 90 percent of Price action. When Price is outside of the bands, it deserves special attention. Often, when Price exceeds the bands, it is soon to reverse, at least temporarily. This fact is phase 1 of a very reliable trade.

I noticed this happening this morning. FAZ (FAZ is a bear market ETF) bucked its up-trend (as seen on longer period charts) and exceeded the lower BBand on the 1 minute chart, and others. From there, it reversed quickly.

Since the Bband channel is still forming a down trend, I waited. When Price closed above the 20 period moving average, I watched very closely. When the upper band went flat and began trending up, I bought a bunch of shares.

From there, Price rose to hit and then exceed the upper band (1 minute timeframe chart). Since it was out of the bands, it pulled back a bit. I wasn't concerned because that is normal behavior. After forming a choppy bull flag, Price took off towards heavenly profits with renewed momentum.

I sold half of my shares at about the peak, and sold the remainder when a lower low formed. Now, my highest profits of the week are locked in and being readied for re-investment.

Here is the chart:

Obviously, I passed over several buy signals.
I might have bought while Price was outside the lower band. That setup has worked (very well) and sometimes failed. (I reserve the right do this in the future, with just a few shares.)

I could have bought in at each of the three pullbacks during the initial recovery. These are fairly reliable, but since the bands are still displaying a down channel, its safer to wait.

The trade described above is so very reliable that I am comfortable enough to invest lots of shares. Hopefully, you will profit from it too! Start small until you get the feel of it.

I understand that the above description might be a bit confusing, please feel free to comment any questions you might have. I will use those comments to update the description as needed (depending on my caffeine and blood-alcohol levels).

Now I think I might go take a nap!

Update: See also my Situational Awareness Post.... Its important.

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