Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
There is one surefire way to find volatility in the market as a technician of trading.
If you have been with me for any length of time, you know that I am a technical trader.
And, if you have been in the markets for any length of time you've probably heard somebody say 'volatility is a trader's best friend.'
The Bollinger bands are an amazing tool to use to find volatility. Every time I wander away from using the tool, it smacks me in the back of the head and tells me to pay attention as it works almost all of the time.
You are going to be hearing more about this over the next few months as it is a foundation of being a trader. If you can't find reliable volatility you are not a trader, you are an investor just searching for capital appreciation.
There is nothing wrong with buying a gold coin and tossing it in a safe - but you are here, That tells me that you want something more, you want actionable movement so you can see measurable growth in your account.
We have three goals for today:
- Teach you how the Bollinger bands are calculated - so you understand how they work.
- Explain what the Bollinger bands are going to tell you about market volatility.
- Show how you can use the Bollinger bands as a trade catalyst.
This is Technical Analysis 101 - we are students of the market and the Bollinger bands are your guide.
Imagine this, you just place a trade that is 4 weeks to expiration, and the company started to make a move that caught your eye...
Out of nowhere, the company decides that it is just going to move sideways and the only thing you can think about is the theta (Time decay - when a position loses value as you approach expiration).
All your premium is just starting to melt away because the stock is not moving, there is no volatility in sight.
All this trouble because for a brief moment you stopped looking at the Bollinger bands.
Maybe, you don't even know what they are, but that is okay, you're in the right place.
What are the Bollinger bands?
Let's start with the technical definition:
A Bollinger band is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security's price, but which can be adjusted to user preferences.
Now, I don't know about you but I am not Garrett Baldwin, and if I was not trading for this long that definition would scare the leftover turkey out of me.
So, put simply, the Bolling bands give you a range that any given security or ETF will naturally trade between based on the volatility trend.
How are the Bollinger bands created?
It is likely your broker just has a button to create the Bollin…
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.