Capital Ideas & Analysis

Further work has been done on the bollinger band/keltner channel squeeze.

Identifying breakout days: Following the work of Larry Williams, breakout days should close in the upper 80% of their range (or lower for breakdowns). this lets us know something key about if we are participating in a breakout day before that days close. its important not to get too picky about this and say, “it was only 78%”. whats important in a breakout day is that the majority of the people on the wrong side lose, and the majority of the people betting in the right direction are in a profit. In addition, these days often arent ones that flirt with the open too much. they establish the first 30 min range, and typically stay on one side of it for the majority of the day (just as Jake Bernstein said)

Throwbacks: after watching these on multiple timeframes and markets, it appears evident to yours truly that when you have a real volatility squeeze, a real breakout, you dont get throwbacks too often. For this, we want a Band squeeze of at least two weeks (for daily charts), ADX below 20, and a consolidation channel of 9 days or greater. These tend to explode out of their consolidation formations without hesitation. News events that spur the ignition of trend are highly coveted.

Stops stops and more stops: Initially, i set the trade up so that you put your stop below the breakout days low, and then only use a channel stop as the trailing exit, along with a price target exit. after trading enough of them though, i sense this is too wide, too long, too “dangerous” for most traders. psychology was not considered. The new rules are such.

1. Initial stop is placed below the breakout days low. To standardize this, I am using a 10 min bar bollinger band. the low of the bollinger band on the breakout day (which is almost always below the low of the day) is where the initial protective stop is placed.

2. Once youve attained two Average True Ranges (ATR) of profit, take 1/4th of the position off and roll your stop on the remaining 3/4ths to breakeven. Or, below the low of the first three breakout days. This allows us to book profits, and take away the anxiety of trading as quickly as possible, without getting out of a trend too quickly.

3. The next stop is to wait for %R to make a counter trend move. in up moves, %R would go to -80, then back above 50. in downtrends, %R would go up to -20, then back below 50. when this happens, you can roll the stop on the remaining 3/4ths to that low or high.

4. Afterwhich, youll want to use the channel stop or price target exit.

5. contingency. Though youll want to use a channel stop for most cases at this point, there are instances where youll get another bollinger band squeeze, while still being in the trade. If that squeeze/formation moves against your original position, close out your profits and flip the position. If it moves your way, it would then be up to you to add to the position or keep the original position on.

These are the things ive learned while trading this system. Evidence is not very convincing it is the most profitable way to trade it, but it is probably the most practical an psychologically soothing. Things we always seek as traders.

Example:

KSS, a trade i put on for this system, breaks out above 40, and so the initial stop is below that days low at roughly 38.9. then, taking that days ATR ($2.00), we add $4 to the breakout and take profits at $44 then put the stop at break even. we then see %R come down and touch -80, and the price associated with this is $42, we then roll the next stop up to there. Then,

When the 20 day channel (62/3-20.66) rises above 42 we will then use that as the next trailing stop with a $53 target.

Hopefully more developments will follow. happy trading.