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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
