It's Christmas! I remember i used to look forward to Santa rally back in those days... how naive... haha but to all those who started trading after blumont crash in 2013, before that it is really easy... Singapore market would just follow US, HK closely... nowadays we can only salivates as we see those two markets break new highs and STI??? Pui chao nua...
Anyway, market changes from time to time. We as traders need to adapt. Go with the flow and follow the tempo.. not a time to be bullish just wait. Don't be like those bitcoin chasers... at USD2000 they call it a bubble and scam... but at USD20k, everyone wants a piece of it. I am out at USD2k plus using coinbase and xfers for those interested to know. I just wanna try how it works, then the more i read the more i dislike. The day China govt shut down the exchanges, i am out. Then i realise all those syndicates smuggling, drug cartels, hackers... bad people in short maybe benefiting from this. By participating, am i funding their crimes? Oh my god.
Then today i read Goldman Sachs may form a trading desk by June 2018 to trade cryptos. Greed of Wall street is really horrible. I cannot imagine when they start to package it and then sell to the commoners... Financial Tsunami part 2 on the cards.
I will be at www.facebook.com/chartnexuschartingsoftware if you wish to talk real-time on stocks.
Otherwise, we are organising a 2 events special at our office on the 27th Dec... all are welcomed! Details are on our facebook.
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DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
Friday, December 22, 2017
Thursday, December 21, 2017
Chip Eng Seng
I started this when i was 24 years old and broke. Now at 39 and financially comfortable, i am trying to come back to blogging. At 24, it was trading and going for quick profits and building equity top of my priority. By the way, i won't care much about my language or grammar, so please excuse me for this. Now at 39, with aging parents, two young kids, trading taken a different perspective. I no longer have the risk appetite, no wonder they say as a man ages - balls shrunk. Ok this blog, as i am writting, primarily i will be sharing my thoughts which are random. It could be stocks, market, FX... life in general... illness...etc... I am already preparing myself for the next 10 years - demise of loved ones is unavoidable and my biggest problem is, i have alot. I will deal with that later. But for now, we talk market.
From October till December, i traded Gold to maintain my sharpness. Leaving the FX trading to the algos we developed. Stocks wise, i developed a method of only participate when there is wide spread strength. Some time last week, at last i saw some buying interest... and taken up a position in ChipEngSeng. The first of many which i am tracking. 18th Dec the volume caught my attention. The subsequent pull back showed very low level of participation. This low participation is expected since it is the holidays. But that doesn't mean the market won't rally. Anyway, i trade alot based on setups rather than market views. I think that suit my style. Although at events, i still have to be market news savvy so the traders are updated, but really, i hate to glue my eyes infront of screen all day long. So no trade setups, i won't place any orders.
I am still looking forward to the day when volume returns and which direction the market takes - that should be key to the next few weeks. We are at the lows... so the position size right here should be significant to take advantage. I always told the guys, we analyse and wait for so long, in the end, if we are right about the direction, our position size should be significant enough so that the rewards is equal to our efforts.
As for gold, i am watching the rising wedge on 4HR chart. I am a big fan of chart patterns. With patterns, it either breakout as what the pattern suggest or more importantly "failed breakout" - which is one of the most tradeable setup. Just let the price and candles guide us.
There, my first post in the longest time. Leave a comment or ask questions if you'd like. Lets do this together.
For complimentary workshops or events on trading, register at www.chartnexus.com/itp
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
From October till December, i traded Gold to maintain my sharpness. Leaving the FX trading to the algos we developed. Stocks wise, i developed a method of only participate when there is wide spread strength. Some time last week, at last i saw some buying interest... and taken up a position in ChipEngSeng. The first of many which i am tracking. 18th Dec the volume caught my attention. The subsequent pull back showed very low level of participation. This low participation is expected since it is the holidays. But that doesn't mean the market won't rally. Anyway, i trade alot based on setups rather than market views. I think that suit my style. Although at events, i still have to be market news savvy so the traders are updated, but really, i hate to glue my eyes infront of screen all day long. So no trade setups, i won't place any orders.
I am still looking forward to the day when volume returns and which direction the market takes - that should be key to the next few weeks. We are at the lows... so the position size right here should be significant to take advantage. I always told the guys, we analyse and wait for so long, in the end, if we are right about the direction, our position size should be significant enough so that the rewards is equal to our efforts.
As for gold, i am watching the rising wedge on 4HR chart. I am a big fan of chart patterns. With patterns, it either breakout as what the pattern suggest or more importantly "failed breakout" - which is one of the most tradeable setup. Just let the price and candles guide us.
There, my first post in the longest time. Leave a comment or ask questions if you'd like. Lets do this together.
For complimentary workshops or events on trading, register at www.chartnexus.com/itp
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
Wednesday, April 05, 2017
TRADING WITH RSI
This article was written in 2007.
While the use of Relative Strength Index (RSI) to get technical buy and sell signals in a range-bound market is well understood, the use of this indicator in a trending market is more intricate. This article covers the use of RSI over the three types of market conditions namely uptrend, downtrend and range-bound or sideway market. We will explore the concept of support and resistance levels which can be used to enhance the accuracy of the RSI signals.
RSI developed by J. Welles Wilder, is
a powerful indicator used to measure the velocity of the price movements.
Unlike other momentum indicators such as Stochastic that have wide variations
even with little overall price movements, RSI is immune to such drawback due to
the way its value is calculated. In brief, RSI values are affected by the
number of days that the price closes up and the number of days that the price
closes down over a certain time period “t”. Commonly used periods for t are 14
and 21 days. In this article, we will use t = 14, the period originally
proposed by Wilder.
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RSI In A Sideway Market
Technical signals are obtained by
setting two levels, typically a high level at 70 and a low level at 30 where
RSI above the 70 level is considered overbought condition while RSI below 30 is
considered oversold condition. An example of the application of RSI is shown in
Figure 1. We observe that during the August 2006 to December 2006 period,
SembMar was trading within the range of $3.20 to $3.58. In such a sideway
market that is showing no bias of significant upward or downward price
movement, RSI works quite well in identifying the tops (RSI in overbought
region) and bottoms (RSI in oversold region) of the price movement.
Figure 1: Example of using RSI in a
sideway market
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RSI In Trending Market
In cases where the price of the stock
is trending upward or downward, the overbought and oversold levels have to be
changed. This is because RSI being an oscillator that oscillates between 0 and
100 will stay high in an up-trending market as there are consistently more days
where prices go up as compared to days when prices go down. Conversely in a
down-trending market, we expect RSI to stay at low values. Using the same
values of 70 for overbought level and 30 for oversold level will mostly result
in wrong signals such as entering and exiting too early or no signal. Such a
scenario is illustrated in Figure 2 where RSI did not even drop below the
30-level as Capitaland trended strongly from $2.80 all the way to $5.00. In
this case, using the 30-level did not generate any entry signal for a long
position. Moreover keeping the 70-level causes Capitaland to be in overbought
condition for long periods of time.
Moving upward both the overbought and
oversold levels to 80 and 40 respectively as illustrated in Figure 3 now
provides clearer trading opportunities. In such up-trending stocks, notice that
the oversold signals actually provide opportunities to enter for a long
position during the short-term downtrend (retracement) in the longer uptrend
price movement.
On the other hand, for RSI trading
opportunities for down-trending stocks, the overbought and oversold levels have
to be shifted downward to 60 and 20 respectively.
The examples of setting different overbought
and oversold levels for different market conditions highlight the importance
for technical analysis practitioners to adapt their use of technical indicators
and indicator settings for different market conditions.
Figure 2: Example of oversold level at
30 for a stock in an uptrend
Figure 3: Example of oversold level at
40 for a stock in an uptrend
To trade solely based on RSI is not
sufficient. Other concepts of technical analysis such candlestick formations,
trendlines and other western indicators must be added to the trading strategy
to serve as confirmation of the signals and to increase the accuracy of the
trading signals. Next, we will employ the concept of support and resistance to
confirm the entry and exit signals generated by RSI.
Support & Resistance
Support
and resistance are very important concepts in technical analysis. While it is easy
to understand, its application is usually not so straight-forward owing to the
many support and resistance lines that can be drawn on any given chart. On the
price chart, we will emphasize on lines that have more contact points with the
price structure. Another important point to note is that a resistance line which
was providing resistance to price movement will provide support if this level
is broken. Conversely a support line will become a resistance line once it is
broken. This is illustrated in Figure 4.
Figure 4: Example of support and
resistance levels
Application Of RSI With Support And Resistance
To increase the effectiveness of the
technical signals, we will buy near support level while RSI is in oversold
condition. Take note that the trend must first be determined in order to select
the appropriate values for the overbought and oversold levels. Figure 5
illustrates the application of this simple strategy on SGX. As SGX is in an uptrend,
the overbought and oversold levels are set to 80 and 40 respectively. Two
excellent bullish technical signals were generated in July and December 2006
when RSI was in oversold region while the price was near the support levels.
In fact, the above scenarios can be
easily captured using an automated system, saving you significant amount of
time and hunting down stocks which present excellent trading opportunities. One
such software is ChartNexus XPertTrader (see Figure 6) which can be used to
automatically screen the market for stocks that have RSI, MACD, Stochastic
bullish and bearish signals. More details can be found at http://www.chartnexus.com
Figure: Example of the application of
RSI and support level to identify bullish signals
While the sections above introduce you
to a simple strategy of using RSI signals coupled with the support and
resistance concept, it is important that you still adopt proper money
management, stock selection and rotational plays techniques in addition to the
timing analysis showcased in this article.
Figure 6: ChartNexus XPertTrader
screens the whole market for technical signals
This article first appeared in Smart Investor in 2007.
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
Thursday, March 23, 2017
Major Reversal Pattern - Double Top
This article was written in 2007.
At every start of a major decline, it was observed that
certain price patterns will occur on the chart.
They are historically proven to at least influence the immediate trend
if not the mid to long term trend. While
most of the investors will be caught off guard as the downtrend persists,
traders who are able to identify reversal patterns will be in a better position
to avoid massive losses. This article
will discuss one of the major top reversal pattern known as the double top
pattern.
As the name suggests, in-order to reverse a trend, there
should be a significant uptrend prior to this reversal pattern. The price will move to a new high and pulls
back to form a trough before another peak fails near the old high of the first
peak. Many traders and investors may
jump to a premature conclusion that a double top pattern has been formed. However, a double top pattern is only
considered formed after the the price has broken the support at the low of the
trough between the two peaks. There are
many variations of this pattern and thus a savvy trader or investor has to be
flexible in applying the techniques to identifying the pattern. As the wise saying goes, “History likes to
repeat itself, but it can repeat in many forms”
After the brief introduction to the price movement of the
double top pattern, we shall now explore the technical specifics of this
pattern. There are guidelines to
identify the best double top pattern. They are, prior trend, price peaks, volume, duration and support turns
resistance.
#1 Prior trend: There must be a
significant uptrend prior to the double top pattern.
#2 Price peaks: The second peak will
not be resisted at the first peak exactly. As a rule of thumb, the difference between the second peak and the first
should be within 4%, either more or less. We should not restrict the second peak to be lower than the first peak.
#3 Volume: The average volume traded
at the second peak should be lower than the first peak. This signifies that when the market retest
the old high, there is an obvious lack of participation as shown by the lower
average volume. Without strong participation,
the rally in price will not sustain.
#4 Duration: The best pattern will take anything from 1 month to 3 months
to form. However, as mentioned, we
should expect variations of the double top pattern and hence some may take a
longer duration to form. Most
importantly the essence of the formation must be present.
Figure 1: Example of
a double top pattern found in STI chart.
Let us look at Figure 1 which shows a double top pattern
found in STI chart. We had a significant
uptrend from the low in August which ends with the first peak formed in
October. A trough then forms in late
October which leads to a price rally that took us to the second peak in early
November. However, a quick check on the
average volume shows that the second peak has a lower average volume as
compared to the first peak. Once the
price broke the low of the trough, the double top pattern is confirmed. Figure 1 also shows that the formation took
about one month to complete.
We can also derive price target base on the
double top pattern. This will give the
trader or investor an idea of where the price is likely to head to.
Figure 2: Example of
projecting a price target
As seen in Figure 2,
to project the price target of a double top pattern, firstly we measure the
height of the peak to the low of the trough.
Lastly, we project the height downwards from the low of the trough and
derive the price target. With the price
target derived, we will know the potential decline of the price.
Figure 3: Example of
support turns resistance
When the double top pattern is confirmed and price had
broken the low of the trough, investors can look forward to a retest of the low
of the trough as a resistance. As seen
in Figure 3, the low of the trough in May 2000 was a support before the second
peak was formed. Once broken, that
support has been retested as a resistance in May 2001. This retest if fails, offers an opportunity
for investors to break jail before another leg down.
This article had discussed how to identify a double top
pattern which is one of the major reversal patterns by paying attention to prior
trend, price peaks, volume and duration.
We also learn how to derive price target from the pattern and look out
for a retest of the low of the trough from a support as a resistance.
This article first appeared in Smart Investor in 2007.
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
Thursday, March 02, 2017
Japanese Candlestick - Hammer
This article was written in 2007.
There are many types of price charts available today and
one of my favorite is the Japanese Candlestick chart. They are very similar to bar charts except
for the many reversal or continuation patterns which we can visually interpret
from a group of successive candles found on the chart. These patterns reflect the change in
psychology of the traders and are useful to identify turning points on the
chart.
A candlestick is made of the candle body which denotes
the opening and closing price and the shadows which denote the intra-period
high and the intra-period low where the period can be one hour, 1 day, one week
or one month. The color of the
candlestick body tells us if the bulls or the bears won the day. Whenever a candlestick has a white body, it
means that the bulls were stronger than the bears and managed to close the
price higher than the opening price. On
the other hand, a candlestick with a black body means that the bears were
stronger than the bulls and managed to close the price below the opening
price. Hence, just by looking at the
color of the candlestick body, we are able to deduce which side of the market
has won the day. As for the shadows
(intra-period high or low), they give us a measure of how much territory the
bulls and bears are willing to give to the other. In the case of long shadows, this also often
reflects that there is a sudden and abrupt change of power between the bulls
and the bears. For example, if Stock A
open at $1.00 and during the trading day it went up to $1.30. With such a surge in price, the bulls are
firmly in control as many would have expected.
However, if by the closing bell, the stock price falls from the
intra-day high of $1.30 to close at $1.00, this will leave a long upper shadow
which starts at the candle body and ends at the intra-day high (assuming we are
looking at a period of a day to draw the candlestick). For the price to fall from its intra-day high
of $1.30 to $1.00, massive selling is required.
This long upper shadow thus showed an abrupt and sudden change of powers
from the bulls to the bears. The
opposite is true for the lower shadow.
In this case, the change of power is from the bears to the bulls and we
get a long lower shadow.
A Hammer is formed if the lower shadow is longer by more
than 2 times the candle body. The upper
shadow should be very minimal (smaller or equal to candle body) or even non
existent. It has a small candle body
which is very close to the upper shadow.
Figure 1 shows an example of a Hammer pattern.
Figure 1: Example of
a Hammer.
In order to use a
Hammer pattern effectively, we have to identify the preceding trend before the
pattern is formed. This is because while
the pattern formed after a downtrend is known as a Hammer, the same pattern can
be formed after an uptrend and is known as a Hanging Man. The interpretation is different. When a Hammer pattern is formed, we observe
that the bulls are strong and managed to beat the bears by closing the price
way above the low of the day. However, when a Hanging Man is formed, we
interpret the pattern differently. We
observe the long lower shadow as evidence that the bears are flexing their
strength in the uptrend but the bulls still manage to stay in control and close
the price way above the low during that day.
When we trade a Hammer or Hanging Man, we want to see a white
confirmation candle and a black confirmation candle respectively.
Figure 2: Hammer with
white candle confirmation
As seen in Figure 2, there was a preceding downtrend
before we observed that a Hammer was formed which is then followed by a white
candle confirmation.
Figure 3: Hanging Man
with black confirmation
In Figure 3, the price was moving in an uptrend before
being interrupted by a Hanging Man pattern.
A black confirmation candle then formed and the price began to retrace.
After learning how to interpret Hammer and Hanging Man
patterns, we are going to explore another way of using this Hammer pattern to
our advantage with or without the white candle confirmation. Since Hammer and Hanging Man reflects a
strong change in power between the bulls and the bears, it will be very
effective if we can spot them near support or resistance levels. These can be determined either by trend
lines, Fibonacci, moving average and so on.
Alternatively, we can use an oscillator like RSI or Stochastic together
with the pattern too.
Figure 4: Example of
Hammer resting on support
In Figure 4, we show how to interpret a Hammer pattern
together with both the 50 day moving average and the Stochastic indicator.
Firstly, the price had been trading lower since early April'07 and a Hammer
pattern was formed (denoted by the small arrow). It was then observed that the end of the
lower shadow sits on the 50-day moving average.
As moving average can be used as support or resistance, in this case, we
say that the price is supported by 50-day moving average. Lastly, Stochastic indicated oversold level
has reached. When the stochastic is in
oversold, there is a possibility of the price moving up. Hence with the Hammer pattern indicating a
strong change in power from the bears to the bulls and with the moving average
supporting the price and Stochastic indicating oversold, the probability of the
price turning higher is very high.
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This article first appeared in Smart Investor in 2007.
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
Thursday, February 09, 2017
Swing trading with candlestick charts
This article was written in 2009.
The Hammer
There are several criteria that must be met:
As seen in Figure 2, there was a preceding downtrend before we observed that a Hammer had formed, which was then followed by a white confirmation candle.
Figure 3 is another example of a Hammer. Instead of having a single Hammer, another Hammer appeared the next day, which signaled that the bull was fighting very hard to win the battle, thus signifying a bullish trend.
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The Hanging man
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This article first appeared in Smart Investor in 2009.
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
The
Japanese Candlestick chart is currently the most popular price chart. It is
interesting to know that the Japanese Candlestick chart had been used in Japan
since the 18th century. It was developed by a Japanese rice trader
named Munehisa Homma. Munehisa Homma, considered one of the most successful
traders in history, claimed that the psychological aspect of the market was
extremely critical to trading success. The emotions of traders were reflected
in the prices and showed in the candles.
A
candlestick consists of the candle body and the shadow; the body denotes the
opening and closing price whereas the shadow denotes the intra-period high and
intra-period low. The period can range from one hour, one day, one week to even
one month depending on the time period. The color of the body depends if the
bulls or bears have won the period. If the bull has won and the closing price
is higher than the opening price, then the body is white in color. If the bear
has won, which means that the closing price is lower than the opening price,
then the body is black in color. Therefore, with just a glance, a person can
easily see if the bull or bear has won within a period.
A
candle pattern can be a single candlestick or multiple candlestick lines. Most
candle patterns are inversely related. For each bullish pattern, there is a
similar bearish pattern. The primary difference is their position relative to
the prior trend of the market.
In
this article, we will study two single candlestick reversal patterns: The
Hammer and the Hangman.
The Hammer
Hammers
are found at the bottom of a downtrend. For the past few days, the bear was
very strong and was victorious in the battle, thus, a number of black candles
appeared and the price trended down. One fine day, when the bear was expected
to win the day again, the bull appeared out of nowhere and ambushed the bear!
This shows that the market has a very bullish feel about it, hence chances of
stock price changing to a short term uptrend is higher.
Figure
1: Hammer candle
There are several criteria that must be met:
- Hammers are usually seen at the bottom of the trend
- The shadow must be at least twice the size of the body
- Can exist in both white or black
- Very little or no upper shadow
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Figure
2: Hammer with white candle confirmation
As seen in Figure 2, there was a preceding downtrend before we observed that a Hammer had formed, which was then followed by a white confirmation candle.
Figure
3: Double Hammer with white candle confirmation
Figure 3 is another example of a Hammer. Instead of having a single Hammer, another Hammer appeared the next day, which signaled that the bull was fighting very hard to win the battle, thus signifying a bullish trend.
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The Hanging man
As
the name implies, the Hanging man has a bearish connotation. The story is very
similar to the hammer but with opposite roles. This time, the bear ambushed the
bull and the market has a bearish feel to it.
Figure 4: Hanging man candles
There are several criteria that must be met:
- Hanging men are usually seen at the top of the trend
- The shadow must be at least twice the size of the body
- Can exist in both white or black candle
- Very little or no upper shadow
Figure
5: Hanging man candles foretell a bearish feeling
Figure
6: The Hanging man foretells a major retracement
Both
Hammer and Hanging man candles look the same but appear in different trends.
Look for the Hammer when stocks have been coming down and look for the Hanging
man when the stock has been continuously going up. When the Hammer or Hanging
man appears, it signifies a possible strong trend reversal.
The
examples above are screened using ChartNexus software with XPertTrader (www.chartnexus.com). The Hammer and
Hangman are two of the patterns that are taught in the ChartNexus Candlesticks
Analysis (CCA) course. Apart from learning about various types of candlesticks
patterns, ChartNexus trainers also educate participants on how to combine
candlesticks analysis with various indicators to achieve the all-important
upper hand in trading.
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This article first appeared in Smart Investor in 2009.
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
Thursday, February 02, 2017
Bollinger Band - Trading on Volatility
This article was written in 2007.
With
emerging markets like the Chinese and Indian economies growing at a fast pace
and recording high percentage growth year over year, the bullishness has
spilled over to the global stock markets with all major indices hitting new
highs at the end of 2006. However, it is unlikely that the world indices will
continue to scale up without any corrections. A classic example of a worldwide
market correction occurred when the Chinese stock market recorded a near 9%
drop in a single-day in Feb 2007. This together with the Yen Carry Trade triggered
a chain reaction of global stock markets melt-down. Since then, global markets had a fast recovery
with the likes of the STI index touching the 3500 points and the Dow Jones
breaking the 13000 points barrier in April 2007. The example of global markets
melt-down and fast recovery demonstrate how volatile the stock market can be.
The willingness to take a higher risk is heavily linked to the fact that people
are better educated and information is easily available with the help of the
internet. Moreover, the one factor in
the stock market that has not changed since its establishment is market
psychology. The human psychologies of fear, greed and hope remain the main culprits
of the high volatility in the stock market.
The
Bollinger Band, developed by John Bollinger, is widely used by traders to trade
the market effectively. The Bollinger Band is constructed using 3 lines; the upper
Bollinger band, the Simple Moving Average line (SMA) and the lower Bollinger
band. The upper and lower Bollinger bands are usually placed at a distance of 2
standard deviations above and below the SMA respectively. Standard deviation is
a mathematical term in which the value is proportional to the volatility of the
price movement. SMA line is the averaging of the close price over a certain
number of days. Hence, when the stock is
trading sideway or the price volatility is low, the upper and lower bands will converge
toward the SMA line. On the other hand, the upper and lower bands will begin to
widen and move away from the SMA line when there is substantial fluctuation in
the stock price. This article will look in the different ways that Bollinger
Bands are used.
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The
first application of Bollinger Band is its use in providing an indication of
support and resistance level. As we expect prices to move in between the upper
and lower bands, the upper band acts as a resistance level to more upsides
while the lower band acts as a support level to more downsides. The following shows how the upper and lower
bands provide support and resistance to the price movement.
Figure 1: Use of Bollinger
Band as Support and Resistance
During the month of January 2007 to April 2007,
FerroChina’s stock price was well-resisted by the upper band, refusing to break
new grounds. On the other hand, during the price retracements in early March
2007 and late April 2007, FerroChina was able to find good support level at the
lower band that prevented the price from diving further.
The second application of Bollinger Band is in the
powerful Bollinger Squeeze which trigger high probability buy and sell signals.
The Bollinger Squeeze occurs when a stock protracted to a period of low volatility
has the upper and lower bands appearing to be squeezed together. A buy or sell
signal is generated when there is a Bollinger breakout from this squeeze of the
lower and upper bands. Figure 2 shows the occurrence of the Bollinger Squeeze
and the subsequent Bollinger breakout when the upper and lower bands begin to
expand suddenly.
Figure 2: Bollinger Squeeze
and Subsequent Bullish Breakout
During the period of January 2007 to March 2007, the big
gap between the upper and lower bands shows that Hyflux was trading with high
volatility. However in Apr 2007, Hyflux started trading sideways and as a
result, the upper and lower bands contracted and squeezed together, indicating
the occurrence of the Bollinger Squeeze. A Bollinger breakout then happened when
both bands suddenly diverged with the price hugging the upper band thereby
triggering a bullish signal. The reverse is true for a breakout to the
downside. This is illustrated in Figure 3 where a Bollinger Squeeze was formed in
April 2007 with the subsequent bearish breakout happening on 23rd of
April 2007.
Figure 3: Bollinger Squeeze
and Subsequent Bearish Breakout
We
can further enhance the Bollinger breakout after the Bollinger Squeeze with
another indicator thus increasing the probability of making a trade in the
right direction of breakout. One popular indicator that can be used together
with the Bollinger Squeeze is the Relative Strength Index (RSI) which was
developed by J. Welles Wilder. The RSI is a powerful indicator used to measure
the velocity of the price movements and the values are calculated based on the
number of days that the price closes up and the number of days that the price
closes down over a certain period of time. In this article, the period of time
used is 14 days which is originally proposed by Wilder. Let us re-visit the
earlier chart (Figure 2) which featured Hyflux where a buy signal was generated
by Bollinger Squeeze on the 25th Apr 2007. An analysis of the RSI
indicator shows that the RSI was well supported during the Bollinger Squeeze and
was trending upwards as the price approaches Bollinger breakout. This signifies
that the price action remain firm throughout the Bollinger Squeeze and it grew
in strength as breakout came beckoning. Figure 4 shows the chart of Hyflux using
RSI indicator in conjunction with Bollinger Band.
Figure 4: Usage of
Bollinger Squeeze with the RSI indicator
The
above scenario of combining RSI and Bollinger Band in our analysis can be
easily captured by using an automated software program which could save a
significant amount of time from looking for these opportunities. One such
software is ChartNexus XPertTrader (www.chartnexus.com)
that can be used to automatically screen the whole market for stocks that have
Bollinger Squeeze together with the RSI trending higher.
This
article has highlighted the importance of understanding the volatility of the
stock market in order to make profitable trades. A powerful indicator such as
Bollinger Band is widely used to identify buy and sell signals based on two
applications. The first involves using the bands as support and resistance with
the second involving looking for a Bollinger Squeeze followed by a Bollinger
breakout.. Combining Bollinger band with the RSI indicator also increases
significantly the probability of the signal being valid.
This article first appeared in Smart Investor in 2007.
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
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