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45

Chapter 14: Walking the Bands

/ \ IV /

/ 111

\ A

Primary Trend

Countertrend

Figure 14.6 Basic Elliott wave pattern.

If Elliott rules or guidelines are employed, it is very important not to get adamant about them. Always go with what actually transpires in the marketplace, not with what you expect to transpire. Disciplines that rely on rigid rules, or exact depictions of the structural aspects of trading, will lead their adherents astray just often enough to do serious damage to their capital.

Though not the subject of this book, approaches such as R. N. Elliotts or W. D. Ganns do contain elements of truth; however, they are not the totalities they are sold as to the masses. By all means use their rules-they are based on long observation of the markets and contain a great deal of wisdom-but use them carefully. The markets dont know they are supposed to follow the rules and often break them out of ignorance, leaving dogmatic adherents without guidance in the best case, or with the wrong guidance in the worst case.

There are no simple answers to the problems of investing. Investing is a tough and complex job; it has always been and will always be so. Simple systems will not suffice. For every wave count there is an alternate clamoring for attention. For every date, there is another, more important, date. Setups where the risk and reward parameters can be quantified are the only reasonable way



Part III: Bollinger Bands on Their Own

to go. The use of ancillary data and/or methods to improve confidence is fine. Just be careful about what you use and how you use it.

Every idea presented in this book can be quantified, and we urge you to do so, just as we urge you to quantify all your other tools. Indeed, such a quantification process is the first step toward building up enough confidence to execute successfully. Why hasnt this been done for you? Because it cant be. Only you know your risk-reward criteria. Only you know whether an approach will work for you. The world of system testing assumes that you will be able to execute the system, but the fact is you are going to second-guess any system-right from the very start. One system may be too volatile, another too slow. The path to success is to survey the ideas presented in this book, choose those that are intuitively correct to you, and then test them on the stocks you trade, in the way you trade, and see if they work for you. It is one thing for someone to baldly assert that something works and quite another for it to work for you.

If you want a simple approach, take one of the three methods presented here and give it a try. Modify it to suit your needs and proceed. However, a better chance for success lies in integrating the ideas presented in this book into your already existing approach. That way you benefit from what you already know and what this book has to offer.

(In addition to the prescreened lists on www.BolringeronBol-lingerBands.com, the professional section of www.EquityTrader.-com presents daily lists of stocks that are walking up or down the Bollinger Bands.)

KEY POINTS TO REMEMBER

Walks up and down the bands are quite common.

There is nothing about a tag of a band that is a buy or sell in and of itself.

Indicators can help distinguish between a confirmed tag and an unconfirmed one.

The average may provide support and entry points during a sustained trend.



1 IT

H I Prk E R

THE SQUEEZE

So far we have examined the process of diagnosing tops and bottoms with Bollinger Bands and looked into the dynamics of walking the bands. In Part IV well add indicators to the decision matrix, but first there is one more important use of the bands in the stand-alone mode, The Squeeze.

The Squeeze draws more questions than any other aspect of Bollinger Bands and is without doubt the most popular Bollinger Bands topic. There is something about a dramatic and/or prolonged contraction of the bands and the subsequent explosion of activity that captures the attention. First, well delve into what The Squeeze is and present a tool to measure it. Then well present some background material on volatility and look at some ideas on how to trade The Squeeze.

Bollinger Bands are driven by volatility, and The Squeeze is a pure reflection of that volatility. When volatility falls to



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