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ConnorsResearchTradingStrategySeries

BollingerBands
TradingStrategies
ThatWork
By
ConnorsResearch,LLC
LaurenceConnors
CesarAlvarez

Copyright 2013, Connors Research LLC.


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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
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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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