ConnorsResearchTradingStrategySeries

BollingerBands
TradingStrategies
ThatWork
By
ConnorsResearch,LLC
LaurenceConnors
CesarAlvarez

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,
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This publication is designed to provide accurate and authoritative information in regard
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Authorization to photocopy items for internal or personal use, or in the internal or
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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
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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
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TableofContents

Section 1

A Look at Trading with Bollinger Bands and %b

Section 2

The Rules

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

ALookatBollinger
Bandsand%b

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CreatedbylegendarymoneymanagerandresearcherJohnBollinger,BollingerBandsareone
ofthemostpopularindicatorsappliedbytradersthroughouttheworldinnearlyallmarkets.
ItsraretodaytoseeachartnotaccompaniedbyBollingerBandsastheyvebecomeamust
havevisualizationtoolwhichallowstraderstoseehowoverboughtoroversoldasecurityis.
TherehasbeenanabundanceofinformationpublishedonhowtotradewithBollingerBands.
Muchofitthoughisdiscretionaryintheory.ThehowtouseBollingerBandsinformation
usuallypushesitbacktothetradertointerpretwhatthesecurityspriceisdoingrelevanttoits
Bands.
ThisGuidebookdoesnot.
WhatyouwilllearnishowtoexactlyidentifyoverboughtandoversoldkeylevelswithBollinger
Bandsandapplyingthemknowingwhatthehistoricalreturnshavebeenwhentheyreached
specificlevels.
WiththeTradingwithBollingerBandsStrategyGuidebook,youwilllearnhowtoidentifythe
besthistoricalentryandexittriggers,alongwithmultiplelevelsofintradaypullbacksto
increasetheedgesoftheBands.Wellalsoteachyouvariousexitpointstoallowforevenmore
flexibilityinyourtrading.
WelookedateveryUnitedStatesstockwhichhastradedonaverageatleast250,000sharesa
daypricedabove$5asharefromJanuary2001May2012(thedatewestartedwritingthe
Guidebook).Thisincludesallstocksalongwiththosethatwereboughtout,delisted,etc.You
areseeingBollingerBands,andespeciallythe%bcomponentofBollingerBandsinplayevery
dayonallliquidstocksforoveradecade.Fromthisyouwillseethatthe%bcomponentof
BollingerBandshashadsignificantpredictiveabilitytoshorttermpriceswhenitsproperly
applied.Asawhole,youhaveoneofthemostrobustquantifiedequitystrategiesforapplying
BollingerBands.
Beforedescribingthestrategy,letslookatexactlywhatBollingerBandsareandalsowhatwe
considertobethegeniuswithintheBollingerBandsthe%bcalculationwhichwewill
specificallyfocuson.

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WhatAreBollingerBands?
BollingerBandsareusedtomeasurethehighnessorlownessofthepricerelativetoprevious
trades.
ForthestrategiesinthisGuidebook,BollingerBandsconsistof:

anupperbandat1timesa5periodstandarddeviationabovethemovingaverage.

alowerbandat1timesa5periodstandarddeviationbelowthemovingaverage.

Thecloserasecurityistoitslowerlevel,themoreoversolditis.Thecloserasecurityitistoits
upperlevel,themoreoverboughtitis.
MostresearchandstrategiesrevolvingaroundBollingerBandsusethisconceptandthentend
toaddotherfilterstothistocreateastrategy.Aswasjustmentioned,fewifanyprovideexact
ruleswithmultipleyearsoftestresults.InthisGuidebookwehavegonefurtherbydoingthis
foryou.
Inouropinion(whichisbackedbystatisticalresults),the%bcomponentoftheBollinger
Bandsallowsyoutobetterpinpointproperentryandexitlevelswhentradingstocks.
%bisanindicatorderivedfromBollingerBands,andquantifiesasecurity'spricerelativetothe
upperandlowerBollingerBand.
Thedefaultsettingfor%bisbasedonthedefaultsettingforBollingerBands(5,1).Thebands
areset1standarddeviationaboveandbelowthe5daysimplemovingaverage,whichisalso
themiddleband.Thesecuritypriceistheclose(orthelasttradeforintradayreadings).
HereistheCalculationfor%b
%b=(PriceLowerBand)/(UpperBandLowerBand)

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

Ideallywhenbuyingasecuritywewantthe%breadingtobebelow0.1formultipledays.The
lowerthe%breadingandthemoredaysinarowbelowthatreading,themoreoversoldthe
securityisandthegreaterthehistoricaledgeshavebeen.Thisisthekeytotradingwith
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BollingerBandsandbyapplyingafewadditionalfilters,youarethenabletobuildstrategies
withhighaveragegainspertradeandhighsuccessratesoverthepast11+years.
Youcanplotthe%bindicatoratStockCharts.com(settings:5,1).
Letsnowgototheexactrulesandparametersandthenlookatthehistoricaltestresults.

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Section 2

TheRules

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WhenyouretradingwithBollingerBandsandespeciallythe%bcomponentofBollinger
Bandsyouwanttobeasstructuredandrulebasedaspossible.Letsnowgototherulesfor
tradinginstocks.
1.Thestockmustbeabove$5pershare.
2.Thestocksaveragedailyvolumeoverthepast21days(onetradingmonth)mustbe
atleast250,000sharesperday.Thisassureswereinliquidstocks.
3.Thestocks100dayhistoricalvolatilityisabove30.(SeetheAppendixfora
definitionofhistoricalvolatility).
4.Thestocks10dayAverageDirectionalIndex(ADX)isabove30.(SeetheAppendixfor
adefinitionofADX).
5.Thestockclosesaboveits200daymovingaverage.
6.The%bofthestockmustbeunderX(X=0.1,0,0.1)Ydaysinarow(Y=2,3,4).A
closeunder0hasthestockclosingunderitslowerband.
7.Iftheaboverulesaremet,buythestocktomorrowonafurtherintradaylimitZ%
belowtodaysclosingprice(Z=4%,6%,8%,or10%).
8.Exitthepositionwhenits%bclosesabove1.0(itsupperband),exitingattheclosing
price.Wellalsoshowthetestresultsexitingwhenthestockclosesabovea%blevelof
0.50,0.75,onthefirstupclose,using2periodRSIexits,movingaverageexits,and
exitingthesameday(daytrade).Thegoalhereistoempoweryouwithasmuch
knowledgeaspossiblewhenexitingthetrade.
LetsnowgodeeperintoRules38.
Rules3and4assurethatthestockhasenoughvolatilityinordertoallowforlargermoves.
Rule5assuresthatthestockisinalongertermuptrend.
Rule6istheretoidentifythepullback.Astockthatclosesbelowa%blevelof0.1multipledays
inarowisagoodshorttermpullback.Wewantthe%bcomponentoftheBollingerBandsto
beunderalowlevelmultipledaysinarow.Thelowerthe%blevelofastock,themorethe
stockisoversoldandthegreateritsreturnshavebeenoverthenextonetotwoweeks.
Rule7helpsmakethe%bpullbackreallystandout.Whereasmostpullbackmethodsmayhave
smalledges,thisruleassuresthatthepullbackisevendeeperandbecauseitsoccurring
intraday,itsoftenaccompaniedbyalotoffear.Moneymanagersespeciallygetnervousand
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oftentelltheirheadtraderstojustgetmeoutaftertheyhavemadethedecisiontosell.This
paniccreatestheopportunity.Wewanttobuythestockonanintradaybasisonafurther
pullbackintradaywithalimitorder.Whatwearedoingistakinganalreadyoversoldstockas
measuredbythe%bandthenwaitingforittobecomeevenmoreoversoldintraday.
Rule8assuresthatwehaveadisciplined,quantizedexitinplace.Fewstrategieshave
quantified,structured,anddisciplinedexitrules.Rule8givesyoutheexactparameterstoexit
thetradebackedbyoveradecadeofhistoricaltestresults.
Letsnowlookatthetestresults.

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Section 3

TestResults

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Whentradersaskwhatisagoodedge(meaningtheaveragegainpertrade)onashortterm
basis(threetotentradingdays),theruleofthumbis%upto2.5%pertrade.Thisincludesall
trades.
Theaveragegainpertradeisthenumberofwinningtradestimestheiraveragegainminusthe
losingtradestimestheiraveragelossdividedbythetotaltrades.So,ifissystemhasatotalof
100tradesand60%make2%onaverageand40%lose1%onaverageyouhave120%minus
40%dividedby100.Inthisexampletheaveragegainpertradeis0.80%.
Shorttermedgesonthelongsideoftenexistbecauseoffear.Thisfearisamanifestationofthe
marketparticipantsandtakestheformofmarketfearand/orindividualstockfear.Thegreatest
edgesappearwhenfearisatthehighest.Wheneveryonebecomesafraid,theyselltheirstocks
mostlyoutofpreservation.Thinkoftheknownphenomenonoffightorflight.Whenthereis
massselling,tradersandinvestorsareinflightmode.Andthisiswheresecuritiesbecome
mispricedonashorttermbasisandtheopportunitiesarise.
Thereareanumberofcomponentstomarketfear.Thetwomostprevalentarecausedbylarge
priceselloffs,orshockstothemarket.Theotheriscausedbytime.Weveseenthisoverand
overagaininquantifiedtesting.Thelongertheselloff,thegreaterthefearthatsetsin,andthe
greatertheedgesthatexist.
Athirdaspectisintradayfear.Itsoneofthemostpowerfulyetleastwrittenaboutaspectsof
trading.Takeastock(ormarket),sellitoffmultipledaysandthenhitithardintraday.That
intradayselloffisoftenpurepanic.Andwhentheypanic,theysellatanypriceandcreatelarge
opportunitiesforyou.YoullseethiswhenwelookattheBollingerBandsstrategyandlookto
buyintradayatextremeintradaypullbacklevels.Thehistoricalreturns(edges)areextremely
high.
Letsnowlookatthetop20returnspervariationofTheBollingerBandsStrategy.Theseare
thereturnsforthe11+yearperiodfromJanuary2001May2012(thetimethisisbeing
written).Withthesetestresultswelluseanexitwhenthestockclosesaboveits%breadingof
1.0.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).Thetop20
variationshaveshowngainsonaveragefrom4.55%pertradeallthewayupto7.86%(an
extremelyhighnumberforstocks).
AverageDaysHeldisthenumberofdaysonaveragethetradewasheld.Inallcasesitsinthe6
to8dayrange.
%ofWinnersisthe%ofsignalswhichclosedoutataprofit.Themajorityhavebeenabove
70%,anextremelyhighlevel,especiallyinaworldwheremostsuccessfultraderslooktobe
correct55%60%ofthetime.
ExitMethodisa%bcloseabove1.0.Welllookatotherexitsaswemoveahead.
EntryLimitistheintradaypullbackusedtotriggeranentry.Thismeansthatthebuytrigger
occursthenextdayX%belowthesignalday.Thereforeiftodaycomesinwithasignal,the
signalisexecutedonlyifthestockpullsbackfurther.Inourtestingwelookedat4%10%limits.
Asyoucansee8%and10%predominatethelistandfurtherreinforcethefactthatthelarger
theintradaypullback,thegreatertheedgeshavebeenusingBollingerBands.
%bCutOffisthe%bLevel.Wetested0.1,0.0and0.1.Thetestresultspredominantlyshow
thatthelowerthe%blevel,themoreoversoldthestockisandthebetterthehistoricalreturns
havebeen.
DaysUnderisthenumberofdaysunderthe%bcutofflevel.Wetestedtwo,three,andfour
daysunderthe%bcutofflevel.Asyoucansee,themoredaysthestockisunderitscutoff
level,themoreoversoldthestockisandthehighertheaveragegainspertradehavebeen.
Thetwobestperformingvariationshavebeen4daysunder0.0or0.1witha10%limitorder.
The0.1cutoffleveldoesntoccurasoftenandthereforethe0.0levelispreferredasitgives
moretrades.
Whatyouhavehereis20differentvariationsof%bshowingconsistentbehaviorovermore
thanadecadesperiodoftime.Thekeyistolockdownthevariationorvariationsthatfitbest
foryouandthenapplytheminasystematicstructuredtradingmanner.%basappliedwith
theseruleshasshownconsistenthealthyedgesforoveradecade.
Letsnowlookatthe20highestperformingvariationsbypercentagecorrectusingthesame
exit.
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Table3.2.Top20StrategiesBasedonPercentWinners

Whenlookingatthevariationswhichhavebeencorrectthemost,weseeabroaderarrayof
variations.Thepercentageofwinnersrangesfromaslowas72.48%uptoashighas77.37%for
thetimeperiodfrom2001upthroughMay2012.Thesenumbersagainconfirmthepowerof
applyingBollingerBandsand%btoyourtrading.
YourenowinpossessionofnumeroussystematicwaystopreciselytradewithBollingerBands
and%b.Letsnowexpandthisknowledgebylookingatdifferentexitstrategies.

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Section 4

TheRoleofExits

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Inthissection,weregoingtoexpandyourknowledgeoftradingwithBollingerBandsby
introducingvariousexitstrategies.Asyouwillsee,theseexitstrategiesimprovethehistorical
resultsevenfurtherandprovideyouwithgreateropportunitiestotradewithBollingerBands
and%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.Whenyouaddinthe
otherexitsyounowseeall20variationsaveragingover6%pertrade.Therobustnesshas
increasedandyounowhavemultipleexitpointsyoucanusetoexityourpositions.

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Table4.2.Top20StrategiesBasedonPercentWinners

Twomainthingsstandout:
1.Bylookingattheadditionalexitstrategies,the%correctgoesupbyahealthyamount.
Wenowseestrategyvariationsshowingpercentcorrectlevelsof77.61%allthewayupto
82.76%.
2.Theaverageholdingperiodforthetradesdropssignificantly,especiallyforexitssuchasa
closingpriceabovethe3periodsimplemovingaverage.Theedgesarelessthantheotherexit
strategiesbutinmanycasestheholdingperiodiscutinhalf.Thisfurtherallowsyoutodecide
whichvariationsandexitsfityoubest.

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Summary
Asyoucansee,knowinghowtoexitaBollingerBandstradeisasimportantasknowingwhen
toenterone.Bylookingatvariouspreciseexitpoints,youreabletoseemorevariationswith
highedgesandahistoricallyhighprobabilityoftradingsuccess.

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Section 5

DayTradingwith
BollingerBands

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EventhoughthisisnotadaytradingGuidebook,wewantedtoshowyoutheintradayedges
thatexistwithspecificvariations.Thesevariationscanbeautomatedforyourtrading.
Successfuldaytradingismostlyagameofpennies.Thebestfirmsandindividualtraderswho
daytradelooktoscalpforasmallamount.UsingBollingerBandsand%bastaughtinthe
previouschaptersshowthatintradayedgesdoexist.
Thelargerdaytradingfirmslookforedgesaslittleas0.1%upto0.5%pertrade(theycantrade
fortinycommissionamountsalongwithreceivingrebates).Individualtradersneedlargeredges
andthoseedgesareoftendifficulttofindoverlongertermperiodsoftime.ByusingBollinger
Bandsthoughwecanseethatedgeshaveexistedforoveradecade.
Belowyouwillseethe10largestintradayhistoricaledgesrangingfrom1.5%pertradeupto
1.87%pertrade.
Table5.1.TheTenLargestIntradayBollingerBandStrategyHistoricalEdge

Thevariationthatintriguesusthemostisthe7thone,whichrequiresthesetupdaytoonly
havetwoconsecutivedayswith%breadingsunder0.1,followedbybuyingthestockata10%
limitandexitingontheclose.
Therehavebeen4845simulatedtradessince2001withover65%ofthesignalsbeingprofitable
(thisisveryhighforanydaytradingstrategy)andanaveragegainof1.63%pertrade(over
threetimeshigherthanwhatthebesttradingfirmsstrivefor).Becausethesesetupsoccurso
oftentheyoffertradersampleopportunitiesthroughouttheyear.

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Summary
WithovernightpositionsthestocksneedtobeatextremeBollingerBandsand%blevels.For
daytradingthisisnotthecase.Simplyhavingastockatabasic%boversoldlevelandthen
waitingforittoselloffintradayby8%10%allowsfornumeroustradestotriggerathigh
successrateswithhealthyintradayedges.

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Section 6

TradingOptionswith
BollingerBands

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PleasenotethattheoptionssectioninthemajorityoftheConnorsResearchTradingStrategy
Seriesisthesamebecausethestrategysetupsofteninvolvelargemovesinbriefperiodsoftime.
Inouropinion,andconfirmedfromfriendswhoareprofessionaloptionstraders(onewithover
threedecadesofexperience);thereisonebestwaytotrademoveslikethese.
Optionstradinghasbeenamajorgrowthindustryoverthepast5yearsinthemarkets.Thisis
becausespreadshavetightened,liquidityhasincreasedandtheabilitytoeasilytradecomplex
optionshasneverbeensimpler.
Wellnowfocusonapplyingoptionstradingtotheshorttermmarketmoveswehavejust
learned.LikeeverythingelseinthisGuidebook,therearedefinitiverulesastohowtoexecute
anoptionstradewhenastrategysignaltriggers.
Hereiswhatweknowbaseduponthedata:
1.Themajorityofthemovesfromentrytoexithavebeenheldaveryshortperiodof
time(67tradingdays).
2.Theaveragegainspertradehavebeenlargewellbeyondthenormaldistributionof
pricesoverthatshortperiodoftime.
3.Ahighpercentageofthemoveshavebeencorrect.
Whenwelookatthistypeofbehavior,itcanleadtomanystrategiesbutonestrategystands
out(andthishasbeenconfirmedbyprofessionaltraders).Thestrategyistobuyfrontmonth,
inthemoneylongcalls.
Whyfrontmonthinthemoneylongcalls?Becausetheywillmovetheclosesttothestock
itself.Andthecloseranoptionmoveswiththestock,thegreaterthegainwillbeona
percentagebasiswhenthemoveiscorrect.
Herearetherules.
1.Asignaltriggers.
2.Buythefrontmonthinthemoneycall.Ifyouweretonormallybuy500sharesof
stock,buy5calls(every100sharesshouldequalonecall).
3.Exittheoptionswhenthesignaltriggersanexitonthestock.
Letsgofurther:
1.Whatdoesinthemoneyexactlymeanhere?

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Inthiscaseitsdefinedasonetotwostrikepricesinthemoney.Ifthestockisat48,buythe40
or45calls.
2.Whatdoesfrontmonthmean?
Becausetheholdingperiodissoshort,youwanttotradetheoptionswhosemonthlyexpiration
istheclosest.Iftheclosestmonthis7tradingdaysorlessfromthefrontmonthsoption
expirationdate(meaningthesecondThursdaybeforeorcloser)usethefollowingmonthasthe
onetotrade.
3.WhathappensifIminthepositionanditexpiresyetthesignalforthestockisstillvalid?
Inthiscase,rolltothenextmonth.Youretradingthestocksignalssoyouwanttohave
exposuretothatsignal.
4.Whataboutliquidityandspreads?
Theressomediscretionhere.Thereisnohardandfastruleastowhatexactlyliquiditymeans
inoptions.Forexample,comparetheliquidityofyourstocktoSPY,whichisextremelyliquid
comparedtoabluechipstock.Bothcanbeconsideredliquid,butthebluechipsoptionwillbe
lessliquidthanSPY.
Assumingthereisactivevolumeintheoptions,lookatthespreads.Iftheoptionistrading3.00
bid3.30offer,thespreadis10%.Canyoureallyovercomea10%spread?Notlikely.Now
comparethistoanoptionthatstradingat3.25bid3.30offer.Thisisfarmoreacceptable
andtradable.
5.Whataretheadvantagesofbuyingcalloptionsinsteadofthestock?
Assumingthespreadsandliquidityarethere,theadvantagesarelarge:
1.GreaterpotentialROIoncapitalinvested.
2.Lessmoneytiedup.
3.Lesspointsatrisk.Thismeansifastocksignalsat50,itcanloseupto50points.The
optionscanonlyloseuptothepremiumyoupaid.So,ifyouboughtthe45calls,the
riskisonlythepremium.
4.Theresgreaterflexibility.Forexample,letssaythestocktriggeredabuysignalat50
andyoupaid5.50forthe45calls.Ifthestockimmediatelymoveshigher(letssayto
56);youhavechoiceshere.Youcanexit,oryoucanrollintothe50callsgettingmost

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ofyourmoneyoutandnowturningthisintoanearlyfreetradeifyoubelievethat
priceswillcontinuetorun.
Therearenumerousexampleslikethisandyoucanfindthesetypesofstrategyopportunitiesin
mostoptionsbooks.Buttradinganythingexoticordifferentotherthansimplybuyingthecalls
isagainsttheadviceofthemanyprofessionalsweposedthisquestionto.
Inconclusion,optionsprovidetraderswithagoodalternativetobuyingtheoutrightstock.The
structuredmethodologyforourstrategiesis:frontmonth,inthemoney,withequivalentsizing
(1optionper100shares),andexitingwhenthesignalexits.
Theaboveoptionsstrategy,inmanyexpertsopinion,isthebestandmostefficientstrategy
baseduponthehistoricaldatafromthesesignals.

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Section 7

AdditionalThoughts

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1.AsyouhaveseenthroughoutthisGuidebook,BollingerBandsandespeciallythe%b
componentoftheBollingerBandshavehadlargequantifiededgeswhenyouapplythemina
systematicmanner.
2.ThereisprecisenesshereusingBollingerBandsinthisway.Usethisprecisenesstoyour
advantage.
3.Thereareliterallyhundredsofpotentialvariationsforyoutouse.Fromthedepthofthe%b
level,tothenumberofdaysbelowthatlevel,tothesizeofthelimit,andtothetypeofexitthat
canbeapplied.Lookattheentirescopeandthenidentifythevariationorvariationsthatfit
bestforyourtradingstyle.
4.Whataboutstops(andweincludetheanswertothisinallourStrategyGuidebooks)?
WehavepublishedresearchonstopsinotherpublicationsincludinginourbookShortTerm
TradingStrategiesThatWork.
Whatwehavefoundisthatstopstendtolessenperformance,andinmanycasesthey
completelyremoveedges.Yes,itfeelsgoodwhenastockkeepsmovinglowerandloweranda
stopgotyouout.Ontheotherside,theresearchwhichisbackedbyuptotwodecadesoftest
resultsonmanyshorttermtradingstrategiessuggeststhatstopsgethitoftenandaccumulate
many,manylosses.Fewtradingstrategiescanovercometheseaggregatedlosses.
Formanytradersstopsareamust.Psychologicallyitallowsthemtotaketrades,especially
difficulttrades.Whetheryouusethemornotisapersonalchoice.Onthewholethough,the
edgesyouseeinthisstrategyandmanyothershorttermstrategiesarelowerwhenstopsare
appliedtothem.Againthisisapersonalchoiceonlyyoucanmakeforyourself.Weknow
successfultradersinbothcamps.
5.Slippageandcommissionwerenotusedinthetesting.Factorthemintoyourtrading(the
entriesareatlimitpricessoslippageisnotanissue)andmakesureyouaretradingatthe
lowestpossiblecosts.Mostfirmsarenowallowingtraderstotradeforunder1centashare,so
shopyourbusiness,especiallyifyouareanactivetrader.Theonlinebrokeragefirmswantyour
business.
6.AsyouhaveseenherewiththeBollingerBandsStrategy,therearelargeedgesinstocks
whichselloffandthensellofffurtherintraday.Thesetradesareoftenaccompaniedbyfear
anduncertaintyandthisiswhenlargeedgesappear.Seekoutthesetradesbecauseasyou
haveseen,theyvebeenlucrativeformanyyears.
WehopeyouenjoyedthisadditiontotheConnorsResearchTradingStrategySeries.Ifyouhave
anyquestionsaboutthisstrategypleasefeelfreetoemailusatinfo@connorsresearch.com
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Appendix

RSI,HistoricalVolatility,
andADXCalculations

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2PeriodRSI
The2dayRSIreferstotheRelativeStrengthIndexwhensettoreadonlythepasttwodaysof
priceaction.
TheRelativeStrengthIndex(RSI)isapopularmomentumoscillatordevelopedbyJ.Welles
Wilderinthe1970s.TheRSIcomparesthemagnitudeofamarketsrecentgainstothe
magnitudeofamarketsrecentlosses.
Asimpleformulacalculatesthispriceactionintoanumberbetween1and100.Marketswith
RSIscloserto1areconsideredoversold.MarketswithRSIscloserto100areconsidered
overbought.
RSI=(100(100/(1+RS)))
RS=Averageofxdaysupcloses/Averageofxdaysdowncloses
TheRSIisgenerallysetfor14periods.However,forshorttermETFtrading,wehavefoundthat
ashortertimeperiodismuchmoreeffective.See2dayRSI,RSI(4).
ThereisagoodexampleandexplanationoftheRSIfoundusingthislink:
http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strengt
h_index_rsi

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HistoricalVolatility
Thehistoricalvolatilityisdefinedasthestandarddeviationofthelogarithmicpricechanges
measuredatregularintervalsoftime.Sincesettlementpricesareusuallyconsideredthemost
reliable,themostcommonmethodofcomputingvolatilityinvolvesusingsettlementto
settlementpricechanges.Wedefinedeachpricechange,xi,as:
xi=ln(Pi/Pi1)
wherePiisthepriceoftheunderlyingcontractattheendoftheithtimeinterval.
Pi/Pi1issometimesreferredtoasthepricerelative.

Wefirstcalculatethestandarddeviationofthelogarithmicpricechanges:

Wethencalculatetheannualvolatilitybymultiplyingthestandarddeviationbythesquareroot
ofthetimeintervalbetweenpricechanges.

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Sincewelookedatpricechangeseveryweek,thetimeintervalis365/7:

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

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AverageDirectionalIndexADX
ADXisanindicatorusedasavalueforthestrengthoftrend.ADXisnondirectionalsoitwill
quantifyatrend'sstrengthregardlessofwhetheritisupordown.Youcanfindmore
informationontheADXathttp://trd.mk/1C.Also,youcanclickheretoseehowtocalculate
ADXhttp://trd.mk/1Dorherehttp://trd.mk/1E.

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