What's Coming Next?
While we can’t predict the future exactly we can approximate the future. Take price action for example. Price is either:
1. Trending and volatile.
2. Trending and quiet.
3. Range-bound and volatile.
4. Range-bound and quiet.
A complete trade plan would include different strategies that are in harmony with each of these market conditions. With that, you can align your working strategy with the current market conditions.
Knowing the present condition is easy, the challenge becomes which condition is next and when will it change?
Technical indicators are helpful. Yes, most are lagging and we’re always looking for leading information but used skillfully indicators can help build your case for timing the change in market conditions.
Bollinger Bands are a fabulous indicator for this purpose. They clearly display trends and volatility, the key data points to consider.
In reading his book, Bollinger on Bollinger Bands, I found a pearl of trading wisdom that stuck with me, and I use all the time. In my own words, “low volatility begets high volatility and vice versa.”
Consider price volatility. Will it stay low, narrow range, and flat… forever? Will it stay high, wide ranging and spiky… forever? Or will it cycle between these states?
Here’s what you know when you see tightly squeezed Bollinger Bands, prices will eventually explode one way or the other. We don’t know when, but we know an increase in volatility is coming and this gives us ample time to plan how we’ll trade that result. Think “entry opportunities.”
The reverse is true. Wide Bollinger Bands will eventually calm down. The directional move will slow, cease, or reverse. Think “exit opportunities.”
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To your trading success,
Mike Siewruk
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