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47 Chapter 15: The Squeeze  Figure 15.4 The Squeeze, a head fake, and a breakout, Adobe, 100 days. First one way then the other. from the beginning, you can take an initial position in the direction of the fake. Then use a technique that sets stop-loss orders behind the position, such as Welles Wilders Parabolic, to reverse to the opposite direction if it is indeed a fake-out.3 This is called using a trailing stop. It is a technique favored by commodity traders whose systems are often in the market full time, reversing from long to short as price moves evolve. If The Squeeze is a reflection of low volatility and low volatility invites high volatility to the table, then there should be an opposite function, a reverse Squeeze, The Expansion, and there is. However, just as bottoms are clearer than tops, a Squeeze is clearer than an Expansion. An Expansion generates an important rule: When a powerful trend is born, volatility expands so much that the lower band will turn down in an uptrend or the upper band will turn up in a downtrend. When that happens, it is an Expansion, and when the Expansion reverses, the odds are very high that the trend is at an end (Figure 15.5). That doesnt necessarily mean the entire move is over. Another leg could easily materialize. But it does mean that
Part III: Bollinger Bands on Their Own  the current leg is most likely over. The realistic expectation is now for a consolidation or a reversal, not the continuation of the trend everybody is hoping for. From a strategic point of view, this is the time to sell options against existing positions, as option premiums will be very high. In the next chapter, well explore a way to exploit The Squeeze in the first of our methods, a volatility breakout system. KEY POINTS TO REMEMBER Low volatility begets high volatility. High volatility begets low volatility. Beware the head fake. Use indicators to forecast direction. Squeeze lists are available on www.BollingeronBollinger-Bands.com.
CHAPTER METHOD I: VOLATILITY BREAKOUT The three methods of using Bollinger Bands presented in this book illustrate three completely different philosophical approaches. Which one is for you we cannot say as it is really a matter of what you are comfortable with. Try each out. Customize them to suit your tastes. Look at the trades they generate and see if you can live with them. Though these techniques were developed on daily charts-the primary time frame we operate in-short-term traders may deploy them on five-minute bar charts, swing traders may focus on hourly or daily charts, while investors may use them on weekly charts. There is really no material difference as long as each is tuned to fit the users criteria for risk and reward, and each is tested on the universe of securities the user trades, in the way the user trades.
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