From the May 2013 issue of Futures Magazine • Subscribe!

Volatility-based support trading

This where the volatility-based support trade setup comes into play, taking advantage of this price phenomenon. These are the parameters:

  • Stock must be above $50 or higher.
  • The stock’s 20-day volume average must be at least 250,000 shares traded daily.
  • The stock must be trading above its 200-day simple moving average.
  • Set Bollinger bands at the 20,2 setting.
  • Set the %b indicator at the 5,1 setting.

Enter a long position when:

  • Price is trading above the mid-line of the Bollinger band and the %b indicator has a reading below -0.10; enter the following day if price trades above the intraday high.
  • Price is trading above the Bollinger band’s mid-line then trades below it while the %b reads -0.10 for two consecutive days; enter a long position as price trades above the previous intraday high.

Your exit is when the %b indicator closes above the 1.0 level. Alternatively, you can have an adjustable stop just under the Bollinger band’s mid-line moving average.

“Support trading scenarios for ALXN” and “ALXN walks the band #2” (below) present two examples of applying this methodology to Alexion Pharmaceuticals (ALXN).

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