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Bollinger Bands Essentials Class 3

Additional Tools

Overview:• Candlesticks with Bollinger bands

• M & W Patterns

• Setting stops

• Homework

Candlesticks With Bollinger BandsCandlesticks

• Represent immediate information on trading sentiment

• Present early turning signals

• When these signals occur at upper or lower bands, they typically lead to swings

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Bollinger Bands Essentials Class 3

Bullish Patterns

• Watch for bullish patterns to appear at:

‣Middle band

‣ Lower Band

• High probability up swing

Bullish Candle Patterns

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Bollinger Bands Essentials Class 3

Bearish Patterns

• Watch for bearish patterns to appear at:

‣Upper band

‣Middle band

• High probability down swing

Bearish Candle Patterns

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Bollinger Bands Essentials Class 3

Candle Summary

• Candles are a very important component in trading bands

• It is critical to know your patterns and understand them

• Candles will help you get in at the right time, and get out

PatternsPatterns Rule!

• It has long been held that price patterns provide the best setups for trade entries

• B. Bands provide a good structure because they are relative rather than absolute

• Patterns show a contraction of price movement

• Bands naturally fit into this mold

• Most patterns end up looking like M’s or W’s in the B. Bands

• %B pairs nicely with these patterns

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Bollinger Bands Essentials Class 3

M’s & W’s

• M’s and W’s are smaller variations on Double Tops or Double Bottoms

• They are very common

• Bollinger bands provide a good frame work to identify them

Traditional Double Top

An M inside BB

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Bollinger Bands Essentials Class 3

Distinctions

• M’s and W’s reflect the end of a swing

• Help identify turning points

• VERY often show up with the B. Band Reversal

Merrill Patterns

• Arthur Merrill identified 16 variations of M and W patterns

• John Bollinger is a big advocate of using these patterns

• A full understanding of these patterns can really help aid your interpretation of prices in bands

M Pattern Variations (From Arthur Merrill’s work originally published in “Behavior of Prices on Wall Street”)

• 16 variations of M’s

• M’s can combine to create more complex patterns (like H&S)

• The last leg of an M is down

• Progressive order with M1 representing strongly falling & M16 representing strongly rising

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Bollinger Bands Essentials Class 3

W Pattern Variations (From Arthur Merrill’s work originally published in “Behavior of Prices on Wall Street”)

• 16 variations of W’s

• W’s can combine to create more complex patterns (like H&S)

• The last leg of an W is up

• Progressive order with W1 representing strongly falling & W16 representing strongly rising

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Bollinger Bands Essentials Class 3

Ideal Setups

M Setups:

• 1st push at or outside upper band

• Pullback often to middle band

• 2nd push falls short of upper band

• Usually marks end of swing/trend

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Bollinger Bands Essentials Class 3

Ideal Setups (Continued)

W Setups

• 1st push at or outside lower band

• Bounces often to middle band

• 2nd push turns above lower band

• Usually marks end of swing/trend

W2 W14

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Bollinger Bands Essentials Class 3

Fractals

• One reason M’s and W’s work is because of fractal theory

• Often they represent a pattern inside another pattern

• Bands are powerful because they show the relative nature of the move

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Bollinger Bands Essentials Class 3

StopsSetting Stops

• As with all systems, setting stops is a must

• The stop is to help PROTECT your capital

• You can choose any system you like, but not using a stop should not be an option

Popular Techniques

• Parabolic SAR

• Moving Averages System

• Trailing Stop

• Stair Stops

With B. Bands

• I prefer Parabolic OR

• A moving average system

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Bollinger Bands Essentials Class 3

Parabolic

• Developed by J. Welles Wilder

• Apply “Parabolic SAR” to your chart

• Simply set your stop where the parabolic says to set it

Moving Average System

• Set stop over or under the middle band (20 SMA)

• This works great in a trend

• It is weak in a sideways move

• In a sideways move you have to go outside upper or lower band

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Bollinger Bands Essentials Class 3

Homework• Go look at several charts and look for Ms and Ws

• Practice identifying candles at extremes inside the bands

• Watch the follow through to see how the trades play out

• Play with the Parabolic SAR