ConnorsResearchTradingStrategySeries

BollingerBandsTradingStrategies

ThatWorkBy

ConnorsResearch,LLCLaurenceConnorsCesarAlvarez

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Copyright 2013, Connors Research LLC. ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher and the author. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author and the publisher are not engaged in rendering legal, accounting, or other professional service. Authorization to photocopy items for internal or personal use, or in the internal or personal use of specific clients, is granted by Connors Research, LLC, provided that the U.S. $7.00 per page fee is paid directly to Connors Research, LLC, 1-973-494-7333. ISBN 978-0-9886931-9-7

Printed in the United States of America.

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Disclaimer By distributing this publication, Connors Research, LLC, Laurence A. Connors and Cesar Alvarez (collectively referred to as Company") are neither providing investment advisory services nor acting as registered investment advisors or broker-dealers; they also do not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEYARE DESIGNEDWITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. Connors Research 10 Exchange Place Suite 1800 Jersey City, NJ 07302

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TableofContents

Section 1 A Look at Trading with Bollinger Bands and %b 5

Section 2 The Rules 9

Section 3 Test Results 12

Section 4 The Role of Exits 17

Section 5 Day Trading With Bollinger Bands and %b 22

Section 6 Trading Options with Bollinger Bands and %b 25

Section 7 Additional Notes 29

Appendix RSI, Historical Volatility, and ADX Calculations 31

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Section 1

ALookatBollingerBandsand%b

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CreatedbylegendarymoneymanagerandresearcherJohnBollinger,BollingerBandsareoneofthemostpopularindicatorsappliedbytradersthroughouttheworldinnearlyallmarkets.ItsraretodaytoseeachartnotaccompaniedbyBollingerBandsastheyvebecomeamusthavevisualizationtoolwhichallowstraderstoseehowoverboughtoroversoldasecurityis.TherehasbeenanabundanceofinformationpublishedonhowtotradewithBollingerBands.Muchofitthoughisdiscretionaryintheory.ThehowtouseBollingerBandsinformationusuallypushesitbacktothetradertointerpretwhatthesecurityspriceisdoingrelevanttoitsBands.ThisGuidebookdoesnot.WhatyouwilllearnishowtoexactlyidentifyoverboughtandoversoldkeylevelswithBollingerBandsandapplyingthemknowingwhatthehistoricalreturnshavebeenwhentheyreachedspecificlevels.WiththeTradingwithBollingerBandsStrategyGuidebook,youwilllearnhowtoidentifythebesthistoricalentryandexittriggers,alongwithmultiplelevelsofintradaypullbackstoincreasetheedgesoftheBands.Wellalsoteachyouvariousexitpointstoallowforevenmoreflexibilityinyourtrading.WelookedateveryUnitedStatesstockwhichhastradedonaverageatleast250,000sharesadaypricedabove$5asharefromJanuary2001May2012(thedatewestartedwritingtheGuidebook).Thisincludesallstocksalongwiththosethatwereboughtout,delisted,etc.YouareseeingBollingerBands,andespeciallythe%bcomponentofBollingerBandsinplayeverydayonallliquidstocksforoveradecade.Fromthisyouwillseethatthe%bcomponentofBollingerBandshashadsignificantpredictiveabilitytoshorttermpriceswhenitsproperlyapplied.Asawhole,youhaveoneofthemostrobustquantifiedequitystrategiesforapplyingBollingerBands.Beforedescribingthestrategy,letslookatexactlywhatBollingerBandsareandalsowhatweconsidertobethegeniuswithintheBollingerBandsthe%bcalculationwhichwewillspecificallyfocuson.

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WhatAreBollingerBands?BollingerBandsareusedtomeasurethehighnessorlownessofthepricerelativetoprevioustrades.ForthestrategiesinthisGuidebook,BollingerBandsconsistof: anupperbandat1timesa5periodstandarddeviationabovethemovingaverage. alowerbandat1timesa5periodstandarddeviationbelowthemovingaverage.Thecloserasecurityistoitslowerlevel,themoreoversolditis.Thecloserasecurityitistoitsupperlevel,themoreoverboughtitis.MostresearchandstrategiesrevolvingaroundBollingerBandsusethisconceptandthentendtoaddotherfilterstothistocreateastrategy.Aswasjustmentioned,fewifanyprovideexactruleswithmultipleyearsoftestresults.InthisGuidebookwehavegonefurtherbydoingthisforyou.Inouropinion(whichisbackedbystatisticalresults),the%bcomponentoftheBollingerBandsallowsyoutobetterpinpointproperentryandexitlevelswhentradingstocks.%bisanindicatorderivedfromBollingerBands,andquantifiesasecurity'spricerelativetotheupperandlowerBollingerBand.Thedefaultsettingfor%bisbasedonthedefaultsettingforBollingerBands(5,1).Thebandsareset1standarddeviationaboveandbelowthe5daysimplemovingaverage,whichisalsothemiddleband.Thesecuritypriceistheclose(orthelasttradeforintradayreadings).HereistheCalculationfor%b%b=(PriceLowerBand)/(UpperBandLowerBand)

%bequals1whenpriceisattheupperband %bequals0whenpriceisatthelowerband %bisabove1whenpriceisabovetheupperband %bisbelow0whenpriceisbelowthelowerband %bisabove.50whenpriceisabovethemiddleband(5daySMA) %bisbelow.50whenpriceisbelowthemiddleband(5daySMA)

Ideallywhenbuyingasecuritywewantthe%breadingtobebelow0.1formultipledays.Thelowerthe%breadingandthemoredaysinarowbelowthatreading,themoreoversoldthesecurityisandthegreaterthehistoricaledgeshavebeen.Thisisthekeytotradingwith

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BollingerBandsandbyapplyingafewadditionalfilters,youarethenabletobuildstrategieswithhighaveragegainspertradeandhighsuccessratesoverthepast11+years.Youcanplotthe%bindicatoratStockCharts.com(settings:5,1).Letsnowgototheexactrulesandparametersandthenlookatthehistoricaltestresults.

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Section 2

TheRules

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WhenyouretradingwithBollingerBandsandespeciallythe%bcomponentofBollingerBandsyouwanttobeasstructuredandrulebasedaspossible.Letsnowgototherulesfortradinginstocks.

1.Thestockmustbeabove$5pershare.2.Thestocksaveragedailyvolumeoverthepast21days(onetradingmonth)mustbeatleast250,000sharesperday.Thisassureswereinliquidstocks.3.Thestocks100dayhistoricalvolatilityisabove30.(SeetheAppendixforadefinitionofhistoricalvolatility).4.Thestocks10dayAverageDirectionalIndex(ADX)isabove30.(SeetheAppendixforadefinitionofADX).5.Thestockclosesaboveits200daymovingaverage.6.The%bofthestockmustbeunderX(X=0.1,0,0.1)Ydaysinarow(Y=2,3,4).Acloseunder0hasthestockclosingunderitslowerband.7.Iftheaboverulesaremet,buythestocktomorrowonafurtherintradaylimitZ%belowtodaysclosingprice(Z=4%,6%,8%,or10%).8.Exitthepositionwhenits%bclosesabove1.0(itsupperband),exitingattheclosingprice.Wellalsoshowthetestresultsexitingwhenthestockclosesabovea%blevelof0.50,0.75,onthefirstupclose,using2periodRSIexits,movingaverageexits,andexitingthesameday(daytrade).Thegoalhereistoempoweryouwithasmuchknowledgeaspossiblewhenexitingthetrade.

LetsnowgodeeperintoRules38.Rules3and4assurethatthestockhasenoughvolatilityinordertoallowforlargermoves.Rule5assuresthatthestockisinalongertermuptrend.Rule6istheretoidentifythepullback.Astockthatclosesbelowa%blevelof0.1multipledaysinarowisagoodshorttermpullback.Wewantthe%bcomponentoftheBollingerBandstobeunderalowlevelmultipledaysinarow.Thelowerthe%blevelofastock,themorethestockisoversoldandthegreateritsreturnshavebeenoverthenextonetotwoweeks.Rule7helpsmakethe%bpullbackreallystandout.Whereasmostpullbackmethodsmayhavesmalledges,thisruleassuresthatthepullbackisevendeeperandbecauseitsoccurringintraday,itsoftenaccompaniedbyalotoffear.Moneymanagersespeciallygetnervousand

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oftentelltheirheadtraderstojustgetmeoutaftertheyhavemadethedecisiontosell.Thispaniccreatestheopportunity.Wewanttobuythestockonanintradaybasisonafurtherpullbackintradaywithalimitorder.Whatwearedoingistakinganalreadyoversoldstockasmeasuredbythe%bandthenwaitingforittobecomeevenmoreoversoldintraday.Rule8assuresthatwehaveadisciplined,quantizedexitinplace.Fewstrategieshavequantified,structured,anddisciplinedexitrules.Rule8givesyoutheexactparameterstoexitthetradebackedbyoveradecadeofhistoricaltestresults.Letsnowlookatthetestresults.

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Section 3

TestResults

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Whentradersaskwhatisagoodedge(meaningtheaveragegainpertrade)onashorttermbasis(threetotentradingdays),theruleofthumbis%upto2.5%pertrade.Thisincludesalltrades.Theaveragegainpertradeisthenumberofwinningtradestimestheiraveragegainminusthelosingtradestimestheiraveragelossdividedbythetotaltrades.So,ifissystemhasatotalof100tradesand60%make2%onaverageand40%lose1%onaverageyouhave120%minus40%dividedby100.Inthisexampletheaveragegainpertradeis0.80%.Shorttermedgesonthelongsideoftenexistbecauseoffear.Thisfearisamanifestationofthemarketparticipantsandtakestheformofmarketfearand/orindividualstockfear.Thegreatestedgesappearwhenfearisatthehighest.Wheneveryonebecomesafraid,theyselltheirstocksmostlyoutofpreservation.Thinkoftheknownphenomenonoffightorflight.Whenthereismassselling,tradersandinvestorsareinflightmode.Andthisiswheresecuritiesbecomemispricedonashorttermbasisandtheopportunitiesarise.Thereareanumberofcomponentstomarketfear.Thetwomostprevalentarecausedbylargepriceselloffs,orshockstothemarket.Theotheriscausedbytime.Weveseenthisoverandoveragaininquantifiedtesting.Thelongertheselloff,thegreaterthefearthatsetsin,andthegreatertheedgesthatexist.Athirdaspectisintradayfear.Itsoneofthemostpowerfulyetleastwrittenaboutaspectsoftrading.Takeastock(ormarket),sellitoffmultipledaysandthenhitithardintraday.Thatintradayselloffisoftenpurepanic.Andwhentheypanic,theysellatanypriceandcreatelargeopportunitiesforyou.YoullseethiswhenwelookattheBollingerBandsstrategyandlooktobuyintradayatextremeintradaypullbacklevels.Thehistoricalreturns(edges)areextremelyhigh.Letsnowlookatthetop20returnspervariationofTheBollingerBandsStrategy.Thesearethereturnsforthe11+yearperiodfromJanuary2001May2012(thetimethisisbeingwritten).Withthesetestresultswelluseanexitwhenthestockclosesaboveits%breadingof1.0.Inalaterchapterwelllookattheresultsusingotherexits.Thegainsandedgesherehavebeensubstantial,especiallyforthelargestintradaypullbacks;thosethathavepulledback6%upto10%.

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Table3.1.Top20StrategiesBasedonAverageGainPerTrade

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Hereisanexplanationofeachcolumn:#TradesisthenumberoftimesthisvariationtriggeredfromJanuary1,2001May31,2012.Eachvariationhashadhundredsandinsomecasesover1000signalstrigger.Average%Profit/Lossistheaveragegainforalltrades(includingthelosingtrades).Thetop20variationshaveshowngainsonaveragefrom4.55%pertradeallthewayupto7.86%(anextremelyhighnumberforstocks).AverageDaysHeldisthenumberofdaysonaveragethetradewasheld.Inallcasesitsinthe6to8dayrange.%ofWinnersisthe%ofsignalswhichclosedoutataprofit.Themajorityhavebeenabove70%,anextremelyhighlevel,especiallyinaworldwheremostsuccessfultraderslooktobecorrect55%60%ofthetime.ExitMethodisa%bcloseabove1.0.Welllookatotherexitsaswemoveahead.EntryLimitistheintradaypullbackusedtotriggeranentry.ThismeansthatthebuytriggeroccursthenextdayX%belowthesignalday.Thereforeiftodaycomesinwithasignal,thesignalisexecutedonlyifthestockpullsbackfurther.Inourtestingwelookedat4%10%limits.Asyoucansee8%and10%predominatethelistandfurtherreinforcethefactthatthelargertheintradaypullback,thegreatertheedgeshavebeenusingBollingerBands.%bCutOffisthe%bLevel.Wetested0.1,0.0and0.1.Thetestresultspredominantlyshowthatthelowerthe%blevel,themoreoversoldthestockisandthebetterthehistoricalreturnshavebeen.DaysUnderisthenumberofdaysunderthe%bcutofflevel.Wetestedtwo,three,andfourdaysunderthe%bcutofflevel.Asyoucansee,themoredaysthestockisunderitscutofflevel,themoreoversoldthestockisandthehighertheaveragegainspertradehavebeen.Thetwobestperformingvariationshavebeen4daysunder0.0or0.1witha10%limitorder.The0.1cutoffleveldoesntoccurasoftenandthereforethe0.0levelispreferredasitgivesmoretrades.Whatyouhavehereis20differentvariationsof%bshowingconsistentbehaviorovermorethanadecadesperiodoftime.Thekeyistolockdownthevariationorvariationsthatfitbestforyouandthenapplytheminasystematicstructuredtradingmanner.%basappliedwiththeseruleshasshownconsistenthealthyedgesforoveradecade.Letsnowlookatthe20highestperformingvariationsbypercentagecorrectusingthesameexit.

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Table3.2.Top20StrategiesBasedonPercentWinners

Whenlookingatthevariationswhichhavebeencorrectthemost,weseeabroaderarrayofvariations.Thepercentageofwinnersrangesfromaslowas72.48%uptoashighas77.37%forthetimeperiodfrom2001upthroughMay2012.ThesenumbersagainconfirmthepowerofapplyingBollingerBandsand%btoyourtrading.YourenowinpossessionofnumeroussystematicwaystopreciselytradewithBollingerBandsand%b.Letsnowexpandthisknowledgebylookingatdifferentexitstrategies.

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Section 4

TheRoleofExits

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Inthissection,weregoingtoexpandyourknowledgeoftradingwithBollingerBandsbyintroducingvariousexitstrategies.Asyouwillsee,theseexitstrategiesimprovethehistoricalresultsevenfurtherandprovideyouwithgreateropportunitiestotradewithBollingerBandsand%b.Welookedatsevendifferentexitstrategies.Theyare:

1.a%breadingofabove1.0.2.a%breadingofabove0.75.3.a%breadingofabove0.50.4.a2periodRSIabove70.5.a2periodRSIabove50.6.closingpriceabovethe5periodsimplemovingaverage.7.closingpriceabovethe3periodsimplemovingaverage.

Herearetheresultsofthebestperformingvariationscombinedwiththeexits.

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Table4.1.Top20StrategiesBasedonAverageGainPerTrade

Acloseabovea%breadingof1.0isstillthebestperformingvariation.Whenyouaddintheotherexitsyounowseeall20variationsaveragingover6%pertrade.Therobustnesshasincreasedandyounowhavemultipleexitpointsyoucanusetoexityourpositions.

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Table4.2.Top20StrategiesBasedonPercentWinners

Twomainthingsstandout:1.Bylookingattheadditionalexitstrategies,the%correctgoesupbyahealthyamount.Wenowseestrategyvariationsshowingpercentcorrectlevelsof77.61%allthewayupto82.76%.2.Theaverageholdingperiodforthetradesdropssignificantly,especiallyforexitssuchasaclosingpriceabovethe3periodsimplemovingaverage.Theedgesarelessthantheotherexitstrategiesbutinmanycasestheholdingperiodiscutinhalf.Thisfurtherallowsyoutodecidewhichvariationsandexitsfityoubest.

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SummaryAsyoucansee,knowinghowtoexitaBollingerBandstradeisasimportantasknowingwhentoenterone.Bylookingatvariouspreciseexitpoints,youreabletoseemorevariationswithhighedgesandahistoricallyhighprobabilityoftradingsuccess.

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Section 5

DayTradingwithBollingerBands

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EventhoughthisisnotadaytradingGuidebook,wewantedtoshowyoutheintradayedgesthatexistwithspecificvariations.Thesevariationscanbeautomatedforyourtrading.Successfuldaytradingismostlyagameofpennies.Thebestfirmsandindividualtraderswhodaytradelooktoscalpforasmallamount.UsingBollingerBandsand%bastaughtinthepreviouschaptersshowthatintradayedgesdoexist.Thelargerdaytradingfirmslookforedgesaslittleas0.1%upto0.5%pertrade(theycantradefortinycommissionamountsalongwithreceivingrebates).Individualtradersneedlargeredgesandthoseedgesareoftendifficulttofindoverlongertermperiodsoftime.ByusingBollingerBandsthoughwecanseethatedgeshaveexistedforoveradecade.Belowyouwillseethe10largestintradayhistoricaledgesrangingfrom1.5%pertradeupto1.87%pertrade.Table5.1.TheTenLargestIntradayBollingerBandStrategyHistoricalEdge

Thevariationthatintriguesusthemostisthe7thone,whichrequiresthesetupdaytoonlyhavetwoconsecutivedayswith%breadingsunder0.1,followedbybuyingthestockata10%limitandexitingontheclose.Therehavebeen4845simulatedtradessince2001withover65%ofthesignalsbeingprofitable(thisisveryhighforanydaytradingstrategy)andanaveragegainof1.63%pertrade(overthreetimeshigherthanwhatthebesttradingfirmsstrivefor).Becausethesesetupsoccursooftentheyoffertradersampleopportunitiesthroughouttheyear.

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SummaryWithovernightpositionsthestocksneedtobeatextremeBollingerBandsand%blevels.Fordaytradingthisisnotthecase.Simplyhavingastockatabasic%boversoldlevelandthenwaitingforittoselloffintradayby8%10%allowsfornumeroustradestotriggerathighsuccessrateswithhealthyintradayedges.

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Section 6

TradingOptionswithBollingerBands

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PleasenotethattheoptionssectioninthemajorityoftheConnorsResearchTradingStrategySeriesisthesamebecausethestrategysetupsofteninvolvelargemovesinbriefperiodsoftime.Inouropinion,andconfirmedfromfriendswhoareprofessionaloptionstraders(onewithoverthreedecadesofexperience);thereisonebestwaytotrademoveslikethese.Optionstradinghasbeenamajorgrowthindustryoverthepast5yearsinthemarkets.Thisisbecausespreadshavetightened,liquidityhasincreasedandtheabilitytoeasilytradecomplexoptionshasneverbeensimpler.Wellnowfocusonapplyingoptionstradingtotheshorttermmarketmoveswehavejustlearned.LikeeverythingelseinthisGuidebook,therearedefinitiverulesastohowtoexecuteanoptionstradewhenastrategysignaltriggers.Hereiswhatweknowbaseduponthedata:

1.Themajorityofthemovesfromentrytoexithavebeenheldaveryshortperiodoftime(67tradingdays).

2.Theaveragegainspertradehavebeenlargewellbeyondthenormaldistributionofpricesoverthatshortperiodoftime.

3.Ahighpercentageofthemoveshavebeencorrect.Whenwelookatthistypeofbehavior,itcanleadtomanystrategiesbutonestrategystandsout(andthishasbeenconfirmedbyprofessionaltraders).Thestrategyistobuyfrontmonth,inthemoneylongcalls.Whyfrontmonthinthemoneylongcalls?Becausetheywillmovetheclosesttothestockitself.Andthecloseranoptionmoveswiththestock,thegreaterthegainwillbeonapercentagebasiswhenthemoveiscorrect.Herearetherules.

1.Asignaltriggers.2.Buythefrontmonthinthemoneycall.Ifyouweretonormallybuy500sharesof

stock,buy5calls(every100sharesshouldequalonecall).3.Exittheoptionswhenthesignaltriggersanexitonthestock.

Letsgofurther:1.Whatdoesinthemoneyexactlymeanhere?

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Inthiscaseitsdefinedasonetotwostrikepricesinthemoney.Ifthestockisat48,buythe40or45calls.2.Whatdoesfrontmonthmean?Becausetheholdingperiodissoshort,youwanttotradetheoptionswhosemonthlyexpirationistheclosest.Iftheclosestmonthis7tradingdaysorlessfromthefrontmonthsoptionexpirationdate(meaningthesecondThursdaybeforeorcloser)usethefollowingmonthastheonetotrade.3.WhathappensifIminthepositionanditexpiresyetthesignalforthestockisstillvalid?Inthiscase,rolltothenextmonth.Youretradingthestocksignalssoyouwanttohaveexposuretothatsignal.4.Whataboutliquidityandspreads?Theressomediscretionhere.Thereisnohardandfastruleastowhatexactlyliquiditymeansinoptions.Forexample,comparetheliquidityofyourstocktoSPY,whichisextremelyliquidcomparedtoabluechipstock.Bothcanbeconsideredliquid,butthebluechipsoptionwillbelessliquidthanSPY.Assumingthereisactivevolumeintheoptions,lookatthespreads.Iftheoptionistrading3.00bid3.30offer,thespreadis10%.Canyoureallyovercomea10%spread?Notlikely.Nowcomparethistoanoptionthatstradingat3.25bid3.30offer.Thisisfarmoreacceptableandtradable.5.Whataretheadvantagesofbuyingcalloptionsinsteadofthestock?Assumingthespreadsandliquidityarethere,theadvantagesarelarge:

1.GreaterpotentialROIoncapitalinvested.2.Lessmoneytiedup.3.Lesspointsatrisk.Thismeansifastocksignalsat50,itcanloseupto50points.The

optionscanonlyloseuptothepremiumyoupaid.So,ifyouboughtthe45calls,theriskisonlythepremium.

4.Theresgreaterflexibility.Forexample,letssaythestocktriggeredabuysignalat50andyoupaid5.50forthe45calls.Ifthestockimmediatelymoveshigher(letssayto56);youhavechoiceshere.Youcanexit,oryoucanrollintothe50callsgettingmost

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ofyourmoneyoutandnowturningthisintoanearlyfreetradeifyoubelievethatpriceswillcontinuetorun.

Therearenumerousexampleslikethisandyoucanfindthesetypesofstrategyopportunitiesinmostoptionsbooks.Buttradinganythingexoticordifferentotherthansimplybuyingthecallsisagainsttheadviceofthemanyprofessionalsweposedthisquestionto.Inconclusion,optionsprovidetraderswithagoodalternativetobuyingtheoutrightstock.Thestructuredmethodologyforourstrategiesis:frontmonth,inthemoney,withequivalentsizing(1optionper100shares),andexitingwhenthesignalexits.Theaboveoptionsstrategy,inmanyexpertsopinion,isthebestandmostefficientstrategybaseduponthehistoricaldatafromthesesignals.

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Section 7

AdditionalThoughts

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1.AsyouhaveseenthroughoutthisGuidebook,BollingerBandsandespeciallythe%bcomponentoftheBollingerBandshavehadlargequantifiededgeswhenyouapplytheminasystematicmanner.2.ThereisprecisenesshereusingBollingerBandsinthisway.Usethisprecisenesstoyouradvantage.3.Thereareliterallyhundredsofpotentialvariationsforyoutouse.Fromthedepthofthe%blevel,tothenumberofdaysbelowthatlevel,tothesizeofthelimit,andtothetypeofexitthatcanbeapplied.Lookattheentirescopeandthenidentifythevariationorvariationsthatfitbestforyourtradingstyle.4.Whataboutstops(andweincludetheanswertothisinallourStrategyGuidebooks)?WehavepublishedresearchonstopsinotherpublicationsincludinginourbookShortTermTradingStrategiesThatWork.Whatwehavefoundisthatstopstendtolessenperformance,andinmanycasestheycompletelyremoveedges.Yes,itfeelsgoodwhenastockkeepsmovinglowerandlowerandastopgotyouout.Ontheotherside,theresearchwhichisbackedbyuptotwodecadesoftestresultsonmanyshorttermtradingstrategiessuggeststhatstopsgethitoftenandaccumulatemany,manylosses.Fewtradingstrategiescanovercometheseaggregatedlosses.Formanytradersstopsareamust.Psychologicallyitallowsthemtotaketrades,especiallydifficulttrades.Whetheryouusethemornotisapersonalchoice.Onthewholethough,theedgesyouseeinthisstrategyandmanyothershorttermstrategiesarelowerwhenstopsareappliedtothem.Againthisisapersonalchoiceonlyyoucanmakeforyourself.Weknowsuccessfultradersinbothcamps.5.Slippageandcommissionwerenotusedinthetesting.Factorthemintoyourtrading(theentriesareatlimitpricessoslippageisnotanissue)andmakesureyouaretradingatthelowestpossiblecosts.Mostfirmsarenowallowingtraderstotradeforunder1centashare,soshopyourbusiness,especiallyifyouareanactivetrader.Theonlinebrokeragefirmswantyourbusiness.6.AsyouhaveseenherewiththeBollingerBandsStrategy,therearelargeedgesinstockswhichselloffandthensellofffurtherintraday.Thesetradesareoftenaccompaniedbyfearanduncertaintyandthisiswhenlargeedgesappear.Seekoutthesetradesbecauseasyouhaveseen,theyvebeenlucrativeformanyyears.WehopeyouenjoyedthisadditiontotheConnorsResearchTradingStrategySeries.Ifyouhaveanyquestionsaboutthisstrategypleasefeelfreetoemailusatinfo@connorsresearch.com

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Appendix

RSI,HistoricalVolatility,andADXCalculations

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2PeriodRSIThe2dayRSIreferstotheRelativeStrengthIndexwhensettoreadonlythepasttwodaysofpriceaction.TheRelativeStrengthIndex(RSI)isapopularmomentumoscillatordevelopedbyJ.WellesWilderinthe1970s.TheRSIcomparesthemagnitudeofamarketsrecentgainstothemagnitudeofamarketsrecentlosses.Asimpleformulacalculatesthispriceactionintoanumberbetween1and100.MarketswithRSIscloserto1areconsideredoversold.MarketswithRSIscloserto100areconsideredoverbought.RSI=(100(100/(1+RS)))RS=Averageofxdaysupcloses/AverageofxdaysdownclosesTheRSIisgenerallysetfor14periods.However,forshorttermETFtrading,wehavefoundthatashortertimeperiodismuchmoreeffective.See2dayRSI,RSI(4).ThereisagoodexampleandexplanationoftheRSIfoundusingthislink:http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_index_rsi

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HistoricalVolatilityThehistoricalvolatilityisdefinedasthestandarddeviationofthelogarithmicpricechangesmeasuredatregularintervalsoftime.Sincesettlementpricesareusuallyconsideredthemostreliable,themostcommonmethodofcomputingvolatilityinvolvesusingsettlementtosettlementpricechanges.Wedefinedeachpricechange,xi,as:

xi=ln(Pi/Pi1)wherePiisthepriceoftheunderlyingcontractattheendoftheithtimeinterval.Pi/Pi1issometimesreferredtoasthepricerelative.

Wefirstcalculatethestandarddeviationofthelogarithmicpricechanges:

Wethencalculatetheannualvolatilitybymultiplyingthestandarddeviationbythesquarerootofthetimeintervalbetweenpricechanges.

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Sincewelookedatpricechangeseveryweek,thetimeintervalis365/7:

Reprintedfrom:Nathanberg,Sheldon.OptionVolatility&Pricing,AdvancedTradingStrategiesandTechniques,2ded.,(Chicago:ProbusPublishing,1994),AppendixB.

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