Improving the Use of Bollinger Bands®

Adding Quantity, Volume, or Flow of Funds Indicators to the Analysis

One of the most exasperating things that happen to Retail and Technical Traders is to find a chart with a perfect setup but the stock has already gapped or run up with a huge one day gain, as High Frequency Trading HFT algorithms triggered the running or gapping of the stock up in the first few minutes of the trading day.

Many traders want to learn how to capture these gains, and be in the stock before a huge gap or big run day and improving the use of Bollinger Bands is the best method.

Bollinger Bands are the best Channel Indicators for Technical Trading, and for finding breakout compression patterns prior to gaps or runs. The ability of the bands to expand and contract, makes them the ideal Channel Indicator to use. However as with ALL Channel, Price, and Time Indicators they require additional indicators as directional signals.

Bollinger Bands tell you that a stock is poised for a strong Momentum Run or gap, but do not tell you whether the Breakout will be to the Upside or Downside. During Trading Range Market Conditions such as we currently have now, it is impossible to “guess” the Breakout direction solely using Price and Time Indicators.

Employing Quantity, Volume, or Flow of Funds Indicators provides the complete set of indicator analysis to determine the direction of the Breakout when using Bollinger Bands. When trading Options this eliminates the need for Options strategies that buy both a Call and a Put, because the trader has no idea what direction the Breakout will go. When trading Stocks it eliminates the risk of whipsaw action, or just assuming that because the Indexes are down that the Breakout will be down also.

This is especially helpful during Bottoming Market Conditions when stocks frequently retest prior bottom lows. Below is a chart example with Volume and Quantity Indicator windows.

chart example with volume and quantity indicator windows - technitrader


1. Quantity Indicators reveal the slow Quiet Rotation™ and Quiet Distribution, and Quiet Accumulation patterns by the giant Buy Side Institutions. The TechniTrader Quiet Accumulation TTQA Indicator was designed for MetaStock users for this purpose. Quantity indicators are used by Professional Traders regularly but are rarely used by Retail Traders. There are both line and histogram Quantity Indicators available.

2. Volume Oscillators are also seldom used by Retail Traders. These offer a significant advantage over Price and Time Oscillators, which tend to give false signal during Momentum Runs, Velocity Runs and other fast moving price action that exceeds the parameters of the price oscillator scaling.

3. The Flow of Funds Indicators are another group of indicators that help determine direction of a Breakout. Oftentimes Smaller Funds and Independent Investors are selling, at the same time giant Buy Side Institutions are quietly buying the same stock hidden from view on Dark Pool venues. These types of indicators show whether money is flowing into or out of the stock.

By incorporating additional indicators into the stock analysis, Retail and Technical Traders can significantly improve their trading profits by identifying the direction of the Breakout prior to price suddenly moving with momentum, a gap, or velocity action caused by HFT triggers.

Summary

Quantity, Volume, or Flow of Funds Indicators are easy to interpret, provide the missing data for a complete stock pick analysis during sideways patterns, and are best for improving the use of Bollinger Bands.

For Options Traders, this is a far more useful analysis than traditional Options Indicators, and it can lower contract costs by providing the missing data needed to choose the proper contract and Option strategy.

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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a MetaStock chart, courtesy of Innovative Market Analysis, LLC dba MetaStock


Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.