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61

Chapter 20: Method III: Reversals

21-day 11% or 20-day AD% is opposite to the tag-a tag of the upper band accompanied by a negative indicator reading or a tag of the lower band accompanied by a positive indicator reading. Now, this approach can be systematized. For example, go long if %b is less than 0.05 and 11% is greater than zero. Or go short if %b is greater than 0.95 and AD% is less than zero.

These positive-tag/negative indicator and negative-tag/positive indicator setups are actually where I got on the bus, and remain near and dear to me. Indeed, I bought a Method III setup with a close outside the band right at long-term support that couldnt have been diagnosed any other way. It was a scary place on the chart, a triple bottom and a potential breakdown. But 11% was very positive, and there was a strong up day the day after the low, clearly suggesting a completed setup. Most importantly, a new low for the stock was close by the entry point, so my risk was well defined, about 2% points. A tag of the upper band, the logical target after such a setup, was 10 points away, suggesting a risk-reward ratio of near 4 to 1. Not too shabby!

It is this ability to deliver setups with good risk-reward ratios that most highly commends Method III setups. The bottom line here is clarification of patterns which are potentially interesting, but on which you might not have the confidence to act without corroboration.

KEY POINTS TO REMEMBER

The buy setup: lower band tag and the oscillator positive.

The sell setup: upper band tag and oscillator negative.

Use MACD to calculate the breadth indicators.

Lists of Method III candidates are available on www.Bollin-geronBollingerBands.com.



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ADVANCED TOPICS

Part V presents the advanced topics of day trading and using Bollinger Bands to normalize indicators. Chart types, indicators, and techniques for day traders are reviewed, and the power technique of using Bollinger Bands to normalize indicators is presented.



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