Elliott Wave: Bollinger Confirmations
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March 21, 2008
Seeing John Bollinger speak a few years ago at the OASIS conference in Santa Clara, USA was a great experience for me personally – his Bollinger Bands indicator is one of my favourite technical tools. Definitely the funniest part of his speech was the story he told of a trader who recognized him in a supermarket and went on to tell him that he thought John was dead! Thankfully, like John, his very versatile trading indicator is also well and truly alive and kicking.
In essence Bollinger Bands give us a relative picture of current prices compared to the (generally recent) past. When a market is ‘tagging’ the lower bands, prices are relatively low. Conversely, when a market is ‘tagging’ the upper bands, prices are relatively high.
Based on this, an easy observation to make on almost any price chart is that significant highs often occur with a bar that has tagged the upper Bollinger Bands. This is not to say that the first time a market tags a band it is time to sell – it can also be a sign of strength. However, if we know that the majority of the time tops will occur with a bar that breaks the upper band, we can use this to confirm various trade set-ups.
Take the recent Wave 4 sell shown in Chart 1 below. The fact that Resources Connection (RECN : NASD) did not tag the lower band on the Wave 3 low indicates that lower lows were likely to come - remembering that significant lows are generally caused by prices being significantly oversold.
Chart 1 – RECN 5 Count
click here for more detail
This set-up is then confirmed first by the upper Bollinger band being tagged by the Wave 4 high - this tells us that prices are relatively high and potentially overbought relative to recent prices. The second confirmation is the cross of the blue line drawn between Wave 3 and Wave 4. This is known as the Elliott Breakout Trigger, or EBOT, and helps anticipate the start of Wave 5.
In a similar fashion, Bollinger Bands can also help spot false breaks of the EBOT. In Chart 2 notice how the Wave 4 low on BAIDU COM (BIDU : NASD) did not tag the Bollinger Bands before the first signal.
Chart 2 – BAIDU False Signal
In Chart 3, we see the real signal is given after the bands were tagged and a second break above the EBOT occurred.
Chart 3 – BAIDU Actual Signal
click here for more detail
These are just a couple of interpretations of the Bollinger Bands, which in my mind is one of the most incisive indicators available. With this in mind it is also interesting to know that John Bollinger discovered this indicator almost by accident while calculating Moving Average Band levels manually. No doubt plenty of Traders, including myself, are glad he did! Until next time...
Happy Trading!
Jordan Craw
Trading Tutors Team
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